Asset Encumbrance

Daniela Migliasso

Asset encumbrance occurs when the bank’s assets are used to secure creditors’ claims or credit-enhance any transaction.

In Europe, asset encumbrance began to be discussed in 2012, after bank funding structures started to shift towards more secured funding compared with the previous decade, owing to the financial crisis that started in 2007.

During the financial crisis years, the interbank unsecured market fell, finally dropping dramatically due to higher counterparty risk concerns. Consequently, banks increased the use of their assets as collateral, having the need to resort to more secured market issuances, particularly covered bonds, and public-sector funding sources in addition to repurchase agreement (repo) funding. At the same time, greater collateralisation resulted from trading activities and related risk mitigation, such as for derivatives and wider use of central counterparty clearing houses (CCPs).

Assets that are encumbered are obviously not available for any other use.

The resulting regulatory concern was that it could be too risky (not only at individual bank level) should asset encumbrance reach excessive percentages due to the different potential types of

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