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Bail-in and asset encumbrance - Implications for banks’ asset liability management

Joachim Erhardt, Johannes Lübbers and Peter N Posch
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Joachim Erhardt: Centre for Finance, Risk & Resource Management (FiRRM), Technical University of Dortmund
Johannes Lübbers: Centre for Finance, Risk & Resource Management (FiRRM), Technical University of Dortmund
Peter N Posch: Centre for Finance, Risk & Resource Management (FiRRM), Technical University of Dortmund

Journal of Banking Regulation, 2017, vol. 18, issue 2, 149-162

Abstract: Abstract In response to the financial crisis the European Union proposes bail-ins as a new regulatory instrument. For banks this mechanism affects the funding costs that now depend on the amount of assets under encumbrance. The bank’s optimal level of asset encumbrance, however, is not necessarily optimal for its senior unsecured investors. In a new simulation framework, we access the effects of the bail-in regulation and the effect on the costs of banks and investors. Analyzing major EU banks’ funding structure we find funding cost should be up to 49 basis points higher to reflect the increased risk for senior unsecured investors. On the other hand all banks of our sample could lower their overall cost level by up to 17 basis points by increasing the level of asset encumbrance.

Keywords: asset encumbrance; asset liability management; covered bonds (search for similar items in EconPapers)
Date: 2017
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