Asset encumbrance, also known as earmarking or pledging assets, refers to the existence of bank assets securing liabilities in the event that an institution fails to meet its financial obligations. It originates from transactions that are typically collateralised or asset-backed, such as repurchase agreements, securitisations, covered bonds, or derivatives. Asset encumbrance not only poses risks to unsecured creditors that are unable to benefit from the liquidation of encumbered assets in case of insolvency, but also has wider stability implications since encumbered assets are generally not available to obtain emergency liquidity in case of an unforeseen stress event. Since the recession, the level of asset encumbrance has rapidly increased, reflecting more stringent collateralisation requirements, especially on over-the-counter (OTC) derivative markets, and increased reliance on secured funding. From 2007 to 2011, the average asset encumbrance ratio of encumbered assets over total assets increased from 11% to 32%, according to the European Systemic Risk Board (“Recommendation of the European Systemic Risk Board of 20th December 2012 on funding of credit institutions” (ESRB/2012/2), February 2013). As such, the topic has gained prominence in the regulatory community, with central banks and supervisors increasingly focusing on monitoring encumbrance levels and ensuring that institutions consider asset encumbrance a key component of their risk management and decision making processes
Posted on: Fri, 25 Jul 2014 19:13:18 +0000
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