EBA published the annual report on asset encumbrance of banks in EU. This report monitors the evolution of asset encumbrance and contributes to the ongoing assessment of the composition of funding sources across EU banks. The assessment showed that the asset encumbrance ratio of banks rose substantially in the first half of 2020. This is because, as COVID-19 spread across Europe and activity in primary markets froze, banks extensively used the central bank liquidity facilities to build precautionary liquidity buffers and to respond to the sharp increase in lending to non‐financial corporates.
The analysis showed that the highest levels of encumbrance are reported in countries where covered bonds are a predominant funding tool (Nordics and Germany), where repos play an important role (France), or where banks have made more extensive use of central bank funding over the past few years (Greece, Italy, and Spain). In contrast, Baltic and Central and Eastern European banks present levels of encumbrance below 10% in most cases. Greek banks, which experienced the biggest decrease in the ratio in 2019, were also the ones that registered the largest increase in their asset encumbrance ratio in the first half of 2020. The increase was also substantial in some core Eurozone countries such as Austria, Belgium, and the Netherlands.
In contrast, the attractive conditions of central bank facilities have led many banks to reduce their reliance on covered bonds. Repos, whose share has remained roughly stable, were the most important source of encumbrance in 2020. Almost half of the total central bank eligible assets were encumbered in June 2020. Nonetheless, banks increased their stock of unencumbered central bank eligible assets and collateral by more than 10% in the first half of 2020. The analysis highlights that supervisory authorities should pay special attention to the increased reliance on central bank funding. Although the recent increase in the asset encumbrance ratio is not a concern by itself, the capacity of banks to further make use of central bank funding when necessary should be monitored.
This report is based on December 2019 and June 2020 data. Although previous editions of this report have focused on year‐end data, the effects of the outbreak of the COVID‐19 pandemic on asset encumbrance deserve particular attention. The report covers the 167 banks from which EBA received data for the June 2020 reference date, based on the implementing technical standards on supervisory reporting. The EU aggregates in this report exclude figures for UK banks but include data for subsidiaries of UK banks in EU countries.
Keywords: Europe, EU, Banking, COVID-19, Asset Encumbrance, Covered Bonds, Credit Risk, Central Bank Liquidity, EBA
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleBank of Italy on Published Update Related to AnaCredit Reporting
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.