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Asset Encumbrance, Bank Funding, and Fragility

Author

Listed:
  • Toni Ahnert
  • Kartik Anand
  • Prasanna Gai
  • James Chapman
  • Philip StrahanEditor

Abstract

We model asset encumbrance by banks subject to rollover risk and study the consequences for fragility, funding costs, and prudential regulation. A bank’s privately optimal encumbrance choice balances the benefit of expanding profitable, yet illiquid, investment funded by cheap long-term senior secured debt, against the cost of greater fragility from runs on unsecured debt. We derive testable implications about encumbrance ratios. The introduction of deposit insurance or wholesale funding guarantees induces excessive encumbrance and fragility. Limits on asset encumbrance or Pigovian taxes eliminate such risk-shifting incentives. Our results shed light on prudential policies currently being pursued in several jurisdictions. Received September 9, 2017; editorial decision July 28, 2018 by Editor Philip Strahan.

Suggested Citation

  • Toni Ahnert & Kartik Anand & Prasanna Gai & James Chapman & Philip StrahanEditor, 2019. "Asset Encumbrance, Bank Funding, and Fragility," The Review of Financial Studies, Society for Financial Studies, vol. 32(6), pages 2422-2455.
    • Handle: RePEc:oup:rfinst:v:32:y:2019:i:6:p:2422-2455.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhy107
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    Citations

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    Cited by:

    1. Enrico Perotti & Rafael Matta, 2015. "Insecure Debt," Tinbergen Institute Discussion Papers 15-035/IV/DSF88, Tinbergen Institute.
    2. Toni Ahnert & Kartik Anand & Philipp Johann König, 2024. "Real Interest Rates, Bank Borrowing, and Fragility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(6), pages 1545-1571, September.
    3. Ahnert, Toni & Martinez-Miera, David, 2021. "Bank Runs, Bank Competition and Opacity," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242348, Verein für Socialpolitik / German Economic Association.
    4. George Kladakis & Lei Chen & Sotirios K. Bellos, 2022. "Wholesale funding and liquidity creation," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1501-1524, November.
    5. Leonello, Agnese & Mendicino, Caterina & Panetti, Ettore & Porcellacchia, Davide, 2022. "Savings, efficiency and bank runs," Working Paper Series 2636, European Central Bank.
    6. Ahnert, Toni & Elamin, Mahmoud, 2020. "Bank runs, portfolio choice, and liquidity provision," Journal of Financial Stability, Elsevier, vol. 50(C).
    7. Robert McKeown, 2017. "An Overview Of The Canadian Banking System: 1996 To 2015," Working Paper 1379, Economics Department, Queen's University.
    8. Garcia-Appendini, Emilia & Gatti, Stefano & Nocera, Giacomo, 2023. "Does asset encumbrance affect bank risk? Evidence from covered bonds," Journal of Banking & Finance, Elsevier, vol. 146(C).
    9. Cardillo, Giovanni & Onali, Enrico & Perdichizzi, Salvatore, 2024. "Investor behavior around targeted liquidity announcements," The British Accounting Review, Elsevier, vol. 56(6).
    10. Alkis Georgiadis-Harris & Maxi Guennewig, 2023. "Bank Resolution, Deposit Insurance, and Fragility," CRC TR 224 Discussion Paper Series crctr224_2023_477, University of Bonn and University of Mannheim, Germany.
    11. Jonas Meuli & Thomas Nellen & Thomas Nitschka, 2021. "Covered bonds, loan growth and bank funding: The Swiss experience since 1932," International Finance, Wiley Blackwell, vol. 24(1), pages 77-94, April.
    12. Ahnert, Toni & Hoffmann, Peter & Leonello, Agnese & Porcellacchia, Davide, 2023. "Central Bank Digital Currency and Financial Stability," CEPR Discussion Papers 18222, C.E.P.R. Discussion Papers.
    13. Kalimipalli, Madhu & Morohunfolu, Olaleye & Ramachandran, Shankar, 2024. "Do repeated government infusions help financial stability? Evidence from an emerging market," Journal of Financial Stability, Elsevier, vol. 75(C).
    14. Zhao Li & Kebin Ma, 2022. "Contagious Bank Runs and Committed Liquidity Support," Management Science, INFORMS, vol. 68(12), pages 9152-9174, December.
    15. Cipollini, Fabrizio & Ielasi, Federica & Querci, Francesca, 2024. "Asset encumbrance in banks: Is systemic risk affected?," Research in International Business and Finance, Elsevier, vol. 67(PA).
    16. Alexopoulou, Ioana & Brancatelli, Calogero & Fudulache, Adina-Elena & Gomes, Diana & Gybas, Daniel & Sauer, Stephan, 2025. "Collateral easing in non-standard times: a review of the role of Additional Credit Claims in the Eurosystem collateral framework," Occasional Paper Series 378, European Central Bank.

    More about this item

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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