Asset encumbrance, bank funding and fragility

Toni Ahnert, Kartik Anand, Prasanna Gai and James Chapman

No 52, ESRB Working Paper Series from European Systemic Risk Board

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. JEL Classification: G01, G21, G28

Keywords: asset encumbrance; encumbrance limits; encumbrance surcharges; fragility; rollover risk; runs; secured debt; unsecured debt; wholesale funding (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-ban and nep-rmg
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Citations: View citations in EconPapers (3)

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https://www.esrb.europa.eu//pub/pdf/wp/esrbwp52.en.pdf (application/pdf)

Related works:
Journal Article: Asset Encumbrance, Bank Funding, and Fragility (2019)
Working Paper: Asset encumbrance, bank funding and fragility (2018)
Working Paper: Asset Encumbrance, Bank Funding and Financial Fragility (2016)
Working Paper: Asset encumbrance, bank funding and financial fragility (2016)
Working Paper: Safe, or not safe? Covered bonds and Bank Fragility (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:201752

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