Does Asset Encumbrance Affect Bank Risk? Evidence from Covered Bonds

55 Pages Posted: 2 Aug 2021

See all articles by Emilia Garcia-Appendini

Emilia Garcia-Appendini

Norges Bank; University of Zurich - Department Finance

Stefano Gatti

Bocconi University - Department of Finance

Giacomo Nocera

Audencia Business School

Date Written: July 7, 2021

Abstract

Theories suggest that asset encumbrance, the ring-fencing of certain assets for protected debtholders, can affect banks’ risk taking and lead to funding instability. We test these hypotheses using a unique, hand-collected dataset on outstanding covered bonds issued by a sample of listed European banks. Our results suggest that the effect of asset encumbrance on risk depends on the proportion of debtholders exerting market discipline and on the bank’s liquidity buffers. We deal with concerns regarding omitted variables and reverse causality using several fixed effects estimations and an instrumental variables approach.

Keywords: Asset encumbrance, covered bond, market discipline, debt priority structure, bank risk

JEL Classification: G01, G21, G28

Suggested Citation

Garcia-Appendini, Emilia and Gatti, Stefano and Nocera, Giacomo, Does Asset Encumbrance Affect Bank Risk? Evidence from Covered Bonds (July 7, 2021). Available at SSRN: https://ssrn.com/abstract=3882495 or http://dx.doi.org/10.2139/ssrn.3882495

Emilia Garcia-Appendini (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

University of Zurich - Department Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Stefano Gatti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Giacomo Nocera

Audencia Business School ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

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