Levered Safe Asset Production and the Collateral Premium
Banks are vital determinants of the supply of money-like safe assets in an economy: banks produce them by issuing short-term liabilities and pledging collateral. But their ability to create safe assets varies considerably over time as leverage constraints fluctuate. I present a model to describe private safe asset production when intermediaries face leverage constraints. I measure bank leverage constraints using bank-intermediated basis trades and show that the collateral premium — a strategy long Treasuries which are used more often as repo collateral and short Treasuries used less often — has a positive expected return of 65 basis points per annum because the collateral premium loads on bank leverage risk.