EBA Issues Report on Asset Encumbrance and Guidelines Under AMLD

The AML/CFT guidelines, under the fourth Anti-Money Laundering Directive (AMLD4 or Directive 2015/849), specify that credit or financial institutions should appoint one member of their management body who will ultimately be responsible for the implementation of the AML/CFT obligations and clarify the tasks and functions of that person. The guidelines also describe the roles and responsibilities of the AML/CFT compliance officer, when this person is appointed by the management body pursuant to the proportionality criteria. When the credit or financial institution is part of a group, the Guidelines prescribe that a group AML/CFT compliance officer should be appointed and clarify this person’s tasks and responsibilities. These Guidelines aim to create a common understanding, by competent authorities and credit or financial institutions, of credit or financial institutions’ AML/CFT governance arrangements. They complement but do not replace relevant guidelines issued by the EBA on wider governance arrangements and suitability checks. The guidelines will be applicable from December 01, 2022 and the deadline for competent authorities to comply with these guidelines will be six months after the publication of the translations.

The report on asset encumbrance analyzes data, from December 2020 to December 2021, on 154 banks covering more than 80% of the European Union/European Economic Area banking sector by total assets. The analysis highlights that, following the COVID-19 outbreak, banks continued to make extensive use of central bank funding in 2021 and over 50% of their central bank eligible-assets and collateral are now encumbered. Thus, the overall encumbrance ratio rose by 2.2 percentage points in 2021 to 29.1%. The encumbrance ratio was comparatively high in some large jurisdictions (Germany, France, and Italy) as well as in Denmark and Finland. Loans and advances other than loans on demand accounted for over half of total encumbered assets and collateral. The key findings suggest that increasing encumbrance ratios might lead to adverse feedback loops of higher encumbrance, higher funding costs, and diminishing liquidity. Going forward, banks might find it challenging to contain their funding costs and may resort more extensively to secured funding or to pledging additional guarantees. The analysis indicates that supervisors should focus on banks that have suffered a substantial rise in encumbrance ratios and whose stock of unencumbered central bank-eligible assets and collateral (CBEAC) is more limited, as these could be an early warning for liquidity and funding risk.

Related Links

• Press Release on AML/CFT Guidelines
• AML/CFT Guidelines
• Press Release on Asset Encumbrance
• Asset Encumbrance Report (PDF)
• Visualization of Asset Encumbrance Data

Keywords: Europe, EU, Banking, AML CFT, Compliance Risk, AMLD, Asset Encumbrance, Basel, Credit Risk, Liquidity Risk, EBA