Collateral scarcity and asset encumbrance: implications for the European financial system

Aerdt Houben and J W. Slingenberg

Financial Stability Review, 2013, issue 17, 197-206

Abstract: In the financial sector, there is increasing demand for high quality collateral assets that combine liquidity with low credit risk. This is fuelled by greater risk aversion since the onset of the global financial crisis in 2008 and by regulatory initiatives such as collateral requirements in derivatives markets and liquidity requirements for banks. In turn, increasing collateral use is boosting the share of encumbered assets on banks’ balance sheets. This may have adverse implications for the financial system. Collateral use adds to complexity, opacity and interconnectedness between financial market participants. Asset encumbrance also reduces the scope for bail-in given less residual assets for unsecured creditors. Beyond this, increasing collateral use exacerbates procyclicality stemming from haircuts, margin requirements and collateral eligibility. Taking a European perspective, this article maps out the recent rise in collateral demand and asset encumbrance, investigates the implications and sketches policy options, including greater transparency, prudential limits, better guarantee pricing and tighter risk management practices.

Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://publications.banque-france.fr/sites/defaul ... eview-17_2013-04.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bfr:fisrev:2011:17:19

Access Statistics for this article

More articles in Financial Stability Review from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC.
Bibliographic data for series maintained by Michael brassart ().