Discussion on "ESBies: safety in the tranches by Markus K. Brunnermeier, Sam Langfield, Marco Pagano, Ricardo Reis, Stijn Van Nieuwerburgh and Dimitri Vayanos"

The ESBies constitute a union-wide safe asset without joint liability across countries. Their aim is to ameliorate two important problems currently plaguing the euro area: (i) lack of safe assets (the Eurozone has only €2.6tn bonds of DE, NL, and LU corresponding to 25% of its GDP, while the US Treasuries amount to 105% of the US GDP); (ii) presence of a diabolic loop between sovereign and bank risk, which leads to flight towards bond issued by safe countries in times of crises. How would ESBies ameliorate these two problems? First, ESBies would duplicate the supply of assets with a 30% junior tranche. Second, they would reduce the diabolic loop significantly since, by constituting a union-safe asset, they would entail a flight to safe assets rather than to safe countries in time of crises.