Asset Encumbrance, Bank Funding and Financial Fragility

Toni Ahnert, Kartik Anand, Prasanna Gai and James Chapman

Staff Working Papers from Bank of Canada

Abstract: How does asset encumbrance affect the fragility of intermediaries subject to rollover risk? We offer a model in which a bank issues covered bonds backed by a pool of assets that is bankruptcy remote and replenished following losses. Encumbering assets allows a bank to raise cheap secured debt and expand profitable investment, but it also concentrates risk on unsecured debt and thus exacerbates fragility and raises unsecured funding costs. Deposit insurance or wholesale funding guarantees induce excessive encumbrance and fragility. To mitigate such risk shifting, we study prudential regulatory tools, including limits on encumbrance, minimum capital requirements and surcharges for encumbrance.

Keywords: Financial Institutions; Financial stability; Financial system regulation and policies (search for similar items in EconPapers)
JEL-codes: D82 G01 G21 G28 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2016
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
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Citations: View citations in EconPapers (3)

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https://www.bankofcanada.ca/wp-content/uploads/2016/04/swp2016-16.pdf

Related works:
Working Paper: Asset encumbrance, bank funding and fragility (2017)
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:bca:bocawp:16-16

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