Does asset encumbrance affect bank risk? Evidence from covered bonds

Emilia Garcia-Appendini, Stefano Gatti and Giacomo Nocera

Journal of Banking & Finance, 2023, vol. 146, issue C

Abstract: Theories suggest that asset encumbrance, the ring-fencing of certain assets for protected debtholders, can affect banks’ risk-taking and lead to funding instability. We test these hypotheses using a unique, hand-collected dataset on outstanding covered bonds issued by a sample of listed European banks. Our results suggest that the effect of asset encumbrance on risk depends on the proportion of debtholders exerting market discipline and on the bank's liquidity buffers. We deal with concerns regarding omitted variables and reverse causality using several fixed effects estimations and an instrumental variables approach. Our findings can alert policymakers about potential side effects of policy interventions that can induce an increase of asset encumbrance in banks.

Keywords: Asset encumbrance; Covered bond; Market discipline; Debt priority; Bank risk (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (4)

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Working Paper: Does Asset Encumbrance Affect Bank Risk? Evidence from Covered Bonds (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:146:y:2023:i:c:s0378426622002850

DOI: 10.1016/j.jbankfin.2022.106705

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