How do asset encumbrance and debt regulations affect bank capital and bond risk?

Stig Helberg and Snorre Lindset

Journal of Banking & Finance, 2014, vol. 44, issue C, 39-54

Abstract: We study how optimal bank capital and bond risk are influenced by asset encumbrance, depositor preference, and bail-in resolution frameworks. Due to changes in optimal capital structure, the net effect on bond debt risk and valuation is small. The effects on shareholder value and public sector liability value are significant. A gap between optimal and required capital represents a cost to shareholders and increases the risk of regulatory arbitrage. The features of bank debt financing we analyze here may explain the stable cross-sectional variation in bank capital documented in literature. Based on a small sample of European banks, we find support for the central model predictions.

Keywords: Asset encumbrance; Bank debt regulations; Optimal bank capital; Bond risk (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:44:y:2014:i:c:p:39-54

DOI: 10.1016/j.jbankfin.2014.03.043

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