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EBA: European banks' asset encumbrance increases

European banks saw a small increase in "asset encumbrance" in 2016 compared to both 2015 and 2014, the European Banking Authority (EBA) has said.02 Aug 2017

Asset encumbrance in this context refers to assets of the bank securing liabilities in the event that the bank fails to meet its financial obligations. The main sources of asset encumbrance are covered bonds, repurchase agreements and over-the-counter derivatives, the report said.

The overall weighted average encumbrance ratio for European banks stood at 26.6% against 25.4% in December 2015. However this varies widely across institutions and countries, as in the previous year, the EBA said.

Some of the countries particularly affected by the sovereign debt crisis showed a decreased dependence towards the use of central bank funding, "which could reflect a general improvement of the funding situation in these countries", the EBA said.

As in previous years, encumbrance is high in jurisdictions with large and established covered bond markets, notably Denmark and Sweden, and those with a high share of central bank funding in countries that were severely affected by the sovereign debt crisis. Countries like the UK with a high share of repurchase agreement financing and collateral requirements for over the counter derivatives also had high levels of asset encumbrance.

"Taking into account the limited time series for this report, the modest uptick in the level of total asset encumbrance in 2016 appears not to be a cause for concern. Nonetheless, the availability of collateral for central bank funding in particular, as well as the use of central bank funding, should be carefully monitored to investigate the changes in funding structures across the EU as official sector funding is reduced. The increase in the volume of over‐the‐counter derivatives as a source of encumbrance, observed in the majority of countries (including some of those driving the increase in encumbrance), should also be monitored," the EBA said.

This third annual report on asset encumbrance can be read alongside a forward-looking report on banks' future funding plans, the Authority said. The EBA began receiving data on asset encumbrance in 2015, following the publication of the implementing technical standards (ITS) published in October 2013, it said.