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Safe Assets, Saving Gluts, and Financial Stability

This presentation discusses the role of safe assets in ensuring financial stability during the global saving glut era. It analyzes the factors contributing to the 2007-2009 global financial crisis and explores the impact of the corporate saving glut on the demand for safe assets. The presentation emphasizes the need for further research to understand the effects of the corporate saving glut on investment, consumption, and the shadow banking system.

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Safe Assets, Saving Gluts, and Financial Stability

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  1. Safe Assets, Saving Gluts, and Financial Stability Presentation for “International Conference on Capital Flows and Safe Assets” Steve Kamin Federal Reserve Board May 2013

  2. Global Financial Crisis 2007-2009 Many factors contributed to the crisis: • Deteriorating underwriting standards for housing • Surge in ABS based on housing loans • Inadequate risk management • Excessive leverage • Dependence on unstable wholesale funding • Gaps in regulatory/supervisory oversight

  3. Global Financial Crisis 2007-2009 Another factor often cited: Global Saving Glut -- Current account surpluses of East Asian economies and oil producers

  4. Chart 1 Global Saving Glut (GSG) Countries: Cumulated CA Balance and Acquisitions of US Assets (2003-2007)

  5. Variant of Global Saving Glut Story:Capital Flows from Europe

  6. Chart 2 Inflows into US Debt Securities over 2003-2007 by the GSG Countries and Europe

  7. Chart 3 Inflows into US Debt Securities over 2003-2007 by the GSG Countries and Europe, by Type of Security

  8. Unlike Global Saving Glut (GSG) countries, Europe not running current account surpluses during this period.

  9. Chart 4 Build-up of Europe’s Cross-Border Positions

  10. Chart 5 Estimated Effects on U.S. Yields from GSG and European Acquisitions of U.S. Assets Source: Bertaut et. al. (2012)

  11. The Corporate Saving Glut

  12. The Corporate Saving Glut and Safe Assets • The corporate saving glut may reflect desire to accumulate safe assets in the face of financial uncertainty. • High corporate saving may contribute to the demand for safe assets.

  13. Possible Effects of The Corporate Saving Glut and Related Demand for Safe Assets Hypotheses: • May be associated with diminished investment or consumption. • May be contributing to the growth of the shadow banking system.

  14. Possible Effects of The Corporate Saving Glut and Related Demand for Safe Assets • More research is needed to assess these effects.

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