Asset Encumbrance and Bank Risk: First Evidence from Public Disclosures in Europe

29 Pages Posted: 25 Jul 2017

Date Written: July 2017

Abstract

Asset encumbrance refers to the existence of bank balance sheet assets being subject to arrangements that restrict the bank's ability to freely transfer or realise them. Asset encumbrance has recently become a much discussed subject and policymakers have been actively addressing what some consider to be excessive levels of asset encumbrance. Despite its importance, the phenomenon of asset encumbrance remains poorly understood. We build a novel dataset of asset encumbrance metrics based on information provided in the banks' public disclosures for the very first time throughout 2015. We provide descriptive evidence of asset encumbrance levels by country, credit quality, and business model using different encumbrance metrics. Our empirical results point to the existence of an association between CDS premia and asset encumbrance that is negative, not positive. That is, on average encumbrance is perceived to be beneficial. Still, certain bank-level variables play a mediating role in this relationship. For banks that have high exposures to the central bank, high leverage ratio, and/or are located in southern Europe, asset encumbrance is less beneficial and could even be detrimental in absolute terms.

Keywords: Asset encumbrance, bank risk, Collateral, credit default swaps

JEL Classification: G01, G21, G28

Suggested Citation

Banal-Estanol, Albert and Benito, Enrique and Khametshin, Dmitry, Asset Encumbrance and Bank Risk: First Evidence from Public Disclosures in Europe (July 2017). CEPR Discussion Paper No. DP12168, Available at SSRN: https://ssrn.com/abstract=3008350

Albert Banal-Estanol (Contact Author)

City University

Khagan
Bangladesh

Enrique Benito

City, University of London ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Dmitry Khametshin

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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