Asset Encumbrance, Bank Funding and Fragility

56 Pages Posted: 5 Nov 2020

See all articles by Toni Ahnert

Toni Ahnert

Government of Canada - Bank of Canada; Centre for Economic Policy Research (CEPR); Systemic Risk Centre - LSE

Kartik Anand

Deutsche Bundesbank

Prasanna Gai

University of Auckland

James T. E. Chapman

Government of Canada - Bank of Canada

Date Written: July, 2017

Abstract

We propose a model of asset encumbrance by banks subject to rollover risk and study the consequences for fragility, funding costs, and prudential regulation. A bank’s choice of encumbrance trades off the benefit of expanding profitable investment funded by cheap long-term secured debt against the cost of greater fragility due to unsecured debt runs. We derive several testable implications about privately optimal encumbrance ratios. Deposit insurance or wholesale funding guarantees induce excessive encumbrance and exacerbate fragility. We show how regulations such as explicit limits on encumbrance ratios and revenueneutral Pigouvian taxes can mitigate the risk-shifting incentives of banks.

Keywords: asset encumbrance, encumbrance limits, encumbrance surcharges, fragility, rollover risk, runs, secured debt, unsecured debt, wholesale funding

JEL Classification: G01, G21, G28

Suggested Citation

Ahnert, Toni and Anand, Kartik and Gai, Prasanna and Chapman, James T. E., Asset Encumbrance, Bank Funding and Fragility (July, 2017). ESRB: Working Paper Series (Topic) 201752, Available at SSRN: https://ssrn.com/abstract=3723399

Toni Ahnert

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
+1 613 782 8765 (Phone)

HOME PAGE: http://toniahnert.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Systemic Risk Centre - LSE ( email )

London
United Kingdom

Kartik Anand (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

HOME PAGE: http://www.bundesbank.de/research_kartik_anand

Prasanna Gai

University of Auckland ( email )

Private Bag 92019
Auckland Mail Centre
Auckland, 1142
New Zealand

James T. E. Chapman

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
2
Abstract Views
25
PlumX Metrics