Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/148123
Authors: 
Ahnert, Toni
Anand, Kartik
Gai, Prasanna S.
Chapman, James
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Working Paper 2016-16
Abstract: 
How does asset encumbrance affect the fragility of intermediaries subject to rollover risk? We offer a model in which a bank issues covered bonds backed by a pool of assets that is bankruptcy remote and replenished following losses. Encumbering assets allows a bank to raise cheap secured debt and expand profitable investment, but it also concentrates risk on unsecured debt and thus exacerbates fragility and raises unsecured funding costs. Deposit insurance or wholesale funding guarantees induce excessive encumbrance and fragility. To mitigate such risk shifting, we study prudential regulatory tools, including limits on encumbrance, minimum capital requirements and surcharges for encumbrance.
Subjects: 
Financial institutions
Financial stability
Financial system
regulation and policies
JEL: 
D82
G01
G21
G28
Document Type: 
Working Paper

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