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'Asset Encumbrance, Bank Funding, and Covered Bonds'

Detail Summary
Date 8 May 2015
Time 12:30 - 14:00

Abstract:

We develop a model of covered bonds to study the effect of secured funding on the fragility of banks subject to rollover risk. Encumbering assets allows a bank to raise secured funding and expand investment. However, it concentrates credit risk on unsecured short-term debt and exacerbates rollover risk. Using global games, we describe the equilibrium in secured and unsecured funding markets. We derive testable implications about how asset encumbrance is affected by the profitability and specificity of investment and the risk appetite in unsecured funding markets. In an extension with insured retail deposits, a micro-prudential regulator would limit asset encumbrance (joint with Kartik Anand, Prasanna Gai and James Chapman).