in Colin Mayer (ed.) et al., Finance and Investment: The European Case
Asset encumbrance refers to the existence of bank balance sheet assets being subject to arrangements that restrict the bank’s ability to freely transfer or realize them. Asset encumbrance has recently become a much discussed subject and policymakers have been actively addressing what some consider to be excessive levels of asset encumbrance. Despite its importance, the phenomenon of asset encumbrance remains poorly understood. We build a novel data set of asset encumbrance metrics based on information provided in the banks’ public disclosures for the very first time throughout 2015. We provide descriptive evidence of asset encumbrance levels by country, credit quality, size, and business model, using different encumbrance metrics. Our empirical results point to the existence of an association between CDS premia and asset encumbrance that is negative, not positive. That is, on average, encumbrance is perceived to be beneficial. Still, certain bank-level variables play a mediating role in this relationship. For banks that have high exposures to the central bank, high leverage ratios, and/or are located in southern Europe, asset encumbrance is less beneficial and could even be detrimental in absolute terms.