Safe assets: made, not just born

BIS Working Papers  |  No 769  | 
20 February 2019



This working paper reassures managers of US dollar reserves at central banks that they need not worry about a shortage of safe assets. This runs counter to the argument that a shortage of safe assets is key to understanding international finance. In that thesis, emerging market economies (EMEs) need to accumulate such assets in line with their own growth. But if advanced economy governments were to issue debt on a scale likely to meet this demand, they risk becoming over-indebted and losing their creditworthiness. Such a hypothetical shortage of safe assets could make managing foreign exchange reserves very difficult. After all, official reserve managers focus on safe assets. 


The working paper constructs the global portfolio of dollar foreign exchange reserves, drawing on three sources. A US Treasury and Federal Reserve annual survey gives holdings of securities and bank deposits in the United States. Then BIS international banking data show holdings of eurodollar bank deposits (mostly repurchase agreements). Finally, a novel estimate of official holdings of offshore bonds comes from indices of US dollar bonds of AAA- and AA-rated sovereigns, subsovereigns, supranationals, and non-US agencies, along with information on the official bid in the primary market.


This portfolio suggests that the safe assets story relies on very restrictive assumptions. On the demand side, EMEs evidently do not need to add to their holdings of safe assets in line with output growth. Indeed, the world may have reached "peak reserves" in 2014. On the supply side, US agencies and banks compete with the US Treasury, even though they depend on government support in adversity. The US Treasury also faces competition from abroad: creditworthy banks, sovereigns, subsovereigns, supranationals and foreign agencies. All in all, dollar reserve managers have invested a third of their fixed income portfolio in instruments other than US Treasury securities.



Official reserve managers have a big stake in the debate over safe assets: their portfolios just about define such assets. This paper conveys the message that reserve managers need not worry about a shortage of safe assets. The debate turns first on whether demand for dollar safe assets will grow as rapidly as emerging market economies (EMEs). Second, it turns on whether the supply of dollar safe assets only grows with US fiscal deficits. Neither holds. On the demand side, EMEs' growth does not require ever higher dollar reserves. Indeed, the global economy may have reached "peak reserves" in 2014. On the supply side, law and policy extend state backing to various IOUs, thereby creating safe assets. US government support for the housing agencies Fannie Mae and Freddie Mac has made their debt into safe assets, albeit with wobbles. Federal Reserve liquidity, Federal Deposit Insurance Corporation insurance, and, in extremis as in 2008, Treasury equity also work to make US bank deposits safe. Elsewhere, government support of banks allows those from well rated countries to compete with US banks in issuing safe dollar deposits. Moreover, supranational organisations, non-US sovereigns and their agencies all compete with the US Treasury in issuing safe dollar bonds. In allocating their dollar foreign exchange reserves, central banks make room for such competitors. In particular, they hold more than a third of such reserves in instruments other than US Treasury securities.

JEL classification: F31, F33, G15

Keywords: safe assets; US Treasury securities; agency securities; bank deposits; Eurodollars; Triffin dilemma