Does asset encumbrance affect bank risk? Evidence from covered bonds
Journal
Journal of Banking & Finance
ISSN
0378-4266
Type
journal article
Date Issued
2023-01
Author(s)
Garcia-appendini Emilia
;
Stefano Gatti
;
Giacomo Nocera
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. Our findings can alert policymakers about potential side effects of policy interventions that can induce an increase of asset encumbrance in banks.
Language
English
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Elsevier BV
Volume
146
Subject(s)
Division(s)