Asset Encumbrance, Bank Funding, and Financial Fragility

Toni Ahnert, Kartik Anand, Prasanna Gai and James Chapman

VfS Annual Conference 2016 (Augsburg): Demographic Change from Verein für Socialpolitik / German Economic Association

Abstract: How does asset encumbrance affect the fragility of intermediaries subject to rollover risk? We offer a model of covered bonds that features the bankruptcy remoteness and replenishment of the asset pool that backs secured funding. 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. Deposit insurance or guarantees induce excessive encumbrance, shifting risks to the deposit insurance fund or the guarantor. Prudential regulation to correct this negative externality are limits on encumbrance, capital requirements, and surcharges on deposit insurance premia.

JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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https://www.econstor.eu/bitstream/10419/145782/1/VfS_2016_pid_6811.pdf (application/pdf)

Related works:
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:zbw:vfsc16:145782

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