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Safe, or not safe? Covered bonds and Bank Fragility

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  • Ahnert, Toni
  • Anand, Kartik
  • Gai, Prasanna
  • Chapman, James

Abstract

We explore the relationship between asset encumbrance and bank funding in the context of covered bonds a form of collateralized debt. Covered bond issuance influences the incidence of bank runs by unsecured creditors and, in turn, conditions in the unsecured funding market influence the bank s choice of asset encumbrance. The more reliant is the bank on secured finance and the more it encumbers assets on its balance sheet, the more concentrated are losses on unsecured creditors and the more fragile the bank. But as more stable long-term debt is added to the funding mix, the greater is the expected value of bank equity. We solve for the optimal choice of asset encumbrance and wholesale funding. Our model sheds light on how losses of confidence in funding markets, macroeconomic shocks, and improved crisis resolution frameworks affect the extent of balance sheet collateralization.

Suggested Citation

  • Ahnert, Toni & Anand, Kartik & Gai, Prasanna & Chapman, James, 2015. "Safe, or not safe? Covered bonds and Bank Fragility," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112875, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc15:112875
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    Cited by:

    1. Benito, Enrique & Banal-Estanol, Albert & Khametshin, Dmitry, 2017. "Asset encumbrance and bank risk: First evidence from public disclosures in Europe," CEPR Discussion Papers 12168, C.E.P.R. Discussion Papers.
    2. 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).
    3. Enrico Perotti & Rafael Matta, 2015. "Insecure Debt," Tinbergen Institute Discussion Papers 15-035/IV/DSF88, Tinbergen Institute.
    4. Ahnert, Toni & Anand, Kartik & König, Philipp Johann, 2022. "Real interest rates, bank borrowing, and fragility," Working Paper Series 2755, European Central Bank.
    5. Ahnert, Toni & Elamin, Mahmoud, 2020. "Bank runs, portfolio choice, and liquidity provision," Journal of Financial Stability, Elsevier, vol. 50(C).
    6. 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.
    7. 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.
    8. 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.
    9. Bhanot, Karan & Larsson, Carl F., 2018. "Uncovering the impact of regulatory uncertainty on credit spreads: A study of the U.S. covered bond experience," Journal of Financial Markets, Elsevier, vol. 39(C), pages 84-110.
    10. Jose Fique, 2017. "The MacroFinancial Risk Assessment Framework (MFRAF), Version 2.0," Technical Reports 111, Bank of Canada.
    11. Ahnert, Toni & Hoffmann, Peter & Leonello, Agnese & Porcellacchia, Davide, 2023. "CBDC and financial stability," Working Paper Series 2783, European Central Bank.
    12. Zhao Li & Kebin Ma, 2022. "Contagious Bank Runs and Committed Liquidity Support," Management Science, INFORMS, vol. 68(12), pages 9152-9174, December.
    13. 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.
    14. Leonello, Agnese & Mendicino, Caterina & Panetti, Ettore & Porcellacchia, Davide, 2022. "Savings, efficiency and bank runs," Working Paper Series 2636, European Central Bank.
    15. Jens Dick-Nielsen & Jacob Gyntelberg, 2019. "Highly Liquid Mortgage Bonds Using the Match Funding Principle," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 10(01), pages 1-37, December.
    16. Robert McKeown, 2017. "An Overview Of The Canadian Banking System: 1996 To 2015," Working Paper 1379, Economics Department, Queen's University.

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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