EconPapers    
Economics at your fingertips  
 

Asset encumbrance, bank funding and fragility

Toni Ahnert (), Kartik Anand, Prasanna Gai and James Chapman ()

No 52, ESRB Working Paper Series from European Systemic Risk Board

Abstract: We propose a model of asset encumbrance by banks subject to rollover risk and study the consequences for fragility, funding costs, and prudential regulation. A bank’s choice of encumbrance trades off the benefit of expanding profitable investment funded by cheap long-term secured debt against the cost of greater fragility due to unsecured debt runs. We derive several testable implications about privately optimal encumbrance ratios. Deposit insurance or wholesale funding guarantees induce excessive encumbrance and exacerbate fragility. We show how regulations such as explicit limits on encumbrance ratios and revenueneutral Pigouvian taxes can mitigate the risk-shifting incentives of banks. JEL Classification: G01, G21, G28

Keywords: asset encumbrance; encumbrance limits; encumbrance surcharges; fragility; rollover risk; runs; secured debt; unsecured debt; wholesale funding (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-rmg
Date: 2017-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
https://www.esrb.europa.eu//pub/pdf/wp/esrbwp52.en.pdf (application/pdf)

Related works:
Working Paper: Asset Encumbrance, Bank Funding and Financial Fragility (2016) Downloads
Working Paper: Asset encumbrance, bank funding and financial fragility (2016) Downloads
Working Paper: Safe, or not safe? Covered bonds and Bank Fragility (2015) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:201752

Access Statistics for this paper

More papers in ESRB Working Paper Series from European Systemic Risk Board 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().

 
Page updated 2019-05-22
Handle: RePEc:srk:srkwps:201752