by Madalen Castells-Jauregui, Dmitry Kuvshinov, Björn Richter & Victoria Vanasco
Our study documents the central role of the foreign sector in the market for safety and explores its macroeconomic implications. Using new data for advanced economies since 1980, we show that foreign demand for safe assets has steadily increased, and that is has been mainly met by safe asset issuances of the domestic financial sector. Such issuances, however, are typically backed by risky loans, and thus the increases in foreign demand for safety may result in domestic credit booms that contribute to macroeconomic instability. The results highlight the importance of carefully managing the creation of safe assets within the global financial system.
Safe assets play a pivotal role in the modern economy. Broadly defined as financial assets with highly certain payments, they are a cornerstone of modern financial markets due to their unique ability to be reliable stores of value, act as collateral in transactions, help fulfil prudential requirements, and serve as key price benchmarks (Gourinchas and Jeanne, 2012).
In recent decades, the demand for safe assets has surged, particularly from emerging economies (Bernanke, 2005). This demand has been met by advanced economies, either through liabilities of the public sector (e.g., government bonds) or the financial sector (e.g., deposits and asset-backed securities). However, it is not clear whether advanced economies can sustainably supply safe assets abroad without jeopardising their own financial stability—especially when these assets are created by private financial institutions (Caballero, Farhi, and Gourinchas, 2017; Maggiori, 2017; Caballero and Simsek, 2020; Ahnert and Perotti, 2021). These challenges raise the question of how global demand for safety interacts with the domestic supply of safe assets, and what this implies for macro-financial stability.
In a recent study, Foreign Demand for Safety and Macroeconomic Instability (Castells-Jauregui, Kuvshinov, Richter, and Vanasco, 2025), we address these issues by analyzing the sectoral composition of safe-asset markets in 21 advanced economies since the 1980s. The study documents the central and growing role of foreign demand, the dominance of the domestic financial sector in meeting that demand, and the macroeconomic consequences of this interaction. The findings show that as foreign demand for safety rises, financial institutions respond by creating safe liabilities backed by risky loans, and that increases in foreign demand for safety are followed by lower medium-term GDP growth.
This policy brief is based on ECB Working Paper Series, No 3126. The views expressed are those of the authors and not necessarily those of the institutions the authors are affiliated with.
Link:
SUERF Policy Brief No, 1337 – How foreign demand for safety creates instability (January 2026)