Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/193559
Authors: 
Ahnert, Toni
Anand, Kartik
Gai, Prasanna
Chapman, James
Year of Publication: 
2017
Series/Report no.: 
ESRB Working Paper Series 52
Abstract: 
We propose a model of asset encumbrance by banks subject to rollover risk and study the consequences for fragility, funding costs, and prudential regulation. A bank's choice of encumbrance trades off the benefit of expanding profitable investment funded by cheap long-term secured debt against the cost of greater fragility due to unsecured debt runs. We derive several testable implications about privately optimal encumbrance ratios. Deposit insurance or wholesale funding guarantees induce excessive encumbrance and exacerbate fragility. We show how regulations such as explicit limits on encumbrance ratios and revenueneutral Pigouvian taxes can mitigate the risk-shifting incentives of banks.
Subjects: 
asset encumbrance
rollover risk
wholesale funding
fragility
runs
secured debt
unsecured debt
encumbrance limits
encumbrance surcharges
JEL: 
G01
G21
G28
Persistent Identifier of the first edition: 
ISBN: 
978-92-95081-93-2
Document Type: 
Working Paper

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