The Role of Safe Assets in Financial Stability

This paper delves into financial stability in the banking sector from the demand side for deposits since some part of the growth of bank liabilities stems from the demand for safe assets. Due to lower risks of safe assets, there is more demand for them in the economy and unless this kind of asset is provided by the government, the non-governmental sector will step forward and create semi-safe assets. It can be argued that some part of the demand for bank deposits in Iran relates to the shortage of safe sovereign assets in a context wherein the government allows the banks to create more liabilities (deposits) and offer them to applicants. Therefore, if sovereign bonds are being supplied in a safe framework, they can both provide the government with sustainable finance and pave the ground for more financial stability. This paper attempts to introduce a framework which converts the government bonds into safe assets.