Bail-in and asset encumbrance - Implications for banks’ asset liability management
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In response to the financial crisis the European Union proposes bail-ins as a new regulatory instrument. For banks this mechanism affects the funding costs that now depend on the amount of assets under encumbrance. The bank’s optimal level of asset encumbrance, however, is not necessarily optimal for its senior unsecured investors. In a new simulation framework, we access the effects of the bail-in regulation and the effect on the costs of banks and investors. Analyzing major EU banks’ funding structure we find funding cost should be up to 49 basis points higher to reflect the increased risk for senior unsecured investors. On the other hand all banks of our sample could lower their overall cost level by up to 17 basis points by increasing the level of asset encumbrance.
Keywordsasset encumbrance asset liability management covered bonds
The authors thank an anonymous referee for helpful comments, Rainer Grupp for research assistance and the participants of the LBBW Workshop, Frankfurt 2014 for helpful remarks. All remaining errors are our own.
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