Asset encumbrance and bank risk: theory and first evidence from public disclosures in Europe

Albert Banal-Estañol (), Enrique Benito (), Dmitry Khametshin and Jianxing Wei ()
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Albert Banal-Estañol: Universitat Pompeu Fabra and Barcelona GSE
Enrique Benito: City, University of London
Jianxing Wei: University of International Business and Economics

No 2131, Working Papers from Banco de España

Abstract: We document that overcollateralisation of banks’ secured liabilities is positively associated with the risk premium on their unsecured funding. We rationalize this finding in a theoretical model in which costs of asset encumbrance increase collateral haircuts and the endogenous risk of a liquidity-driven bank run. We then test the model’s predictions using a novel dataset on asset encumbrance of the European banks. Our empirical analysis demonstrates that banks with more costly asset encumbrance have higher rates of overcollateralisation and rely less on secured debt. Consistent with theory, the effects are stronger for banks that are likely to face higher fire-sales discounts. This evidence acts in favour of the hypothesis that asset encumbrance increases bank risk, although this relationship is rather heterogeneous.

Keywords: asset encumbrance; collateral; bank risk; credit default swaps (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2021-08
New Economics Papers: this item is included in nep-ban, nep-eec, nep-fmk, nep-isf and nep-rmg
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2131

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