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EBA Report on Asset Encumbrance (August 2019) Summary

Core Content

This report provides an analysis of asset encumbrance in European banks, focusing on trends, country-specific data, and the composition of encumbrance sources. It aims to monitor the evolution of encumbrance and support the assessment of funding sources across the EU.

Key Findings

Asset Encumbrance Ratio

• The asset encumbrance ratio remained stable at 27.9% in December 2018, compared to 27.9% in 2017.
• This stability is due to an almost equal increase in the numerator (encumbered assets and collateral) and the denominator (total assets and collateral received).
• The ratio increased from 26.6% in 2016 to 27.9% in 2018, indicating a long-term upward trend that paused in 2018.

Encumbrance by Country

• The UK, France, and Germany had the highest absolute levels of encumbered assets and collateral.
• Countries with large covered bond markets (e.g., Nordic countries) and high central bank funding reliance (e.g., Greece, Italy) showed higher encumbrance ratios.
• Greece recorded the most significant decrease in its encumbrance ratio, from 31.6% in 2017 to 23.9% in 2018, reflecting reduced reliance on central bank funding.
• Latvia and Estonia had the lowest encumbrance ratios, with Latvia at 0.2% and Estonia at 0% in 2018.
• Most countries showed stable trends in their encumbrance ratios over the last five quarters, with minimal volatility.

Encumbrance by Asset Class

• Debt securities made up the largest share of encumbered assets and collateral at 47.3% in 2018, up from 44.5% in 2017.
• Loans and advances (excluding loans on demand) accounted for 37.6% of encumbered assets and collateral in 2018, down from 42% in 2016.
• Equity instruments decreased in share, while other assets slightly declined from 20% in 2017 to 18.2% in 2018.
• Unencumbered assets and collateral showed a similar distribution to 2017, with a slight increase in loans and advances and a decrease in equity instruments and other assets.

Sources of Encumbrance

• Repurchase agreements (reps) remain the most significant source of encumbrance, accounting for 30% of encumbered assets and collateral in 2018, up from 27% in 2017.
• The UK and France had the highest shares of repos at 44% and 34%, respectively.
• Central bank funding decreased to 10% of encumbrance sources in 2018, down from 10.5% in 2017.
• Countries like Latvia and Cyprus still heavily relied on central bank funding, with shares of 93% and 83.9%, respectively.
• OTC derivatives had a smaller share in encumbrance sources, decreasing to 7.6% from 8.2% in 2017.

Overcollateralisation (OC)

• The overall OC level increased slightly to 110.5% in 2018 from 109.1% in 2017.
• Covered bonds were the most overcollateralised liabilities, with an OC level of 124.1%.
• Central bank funding had a high OC level in Cyprus (358%) and Lithuania (251%), while the OC level for ABS decreased in several countries, including the Iberian nations.
• There was a significant dispersion in OC levels across countries, with some as low as 19% and others as high as 3700%.

Regional Trends

• Countries affected by the sovereign debt crisis (e.g., Greece, Ireland, Portugal) showed improvements in their encumbrance ratios, with Greece recording the largest decrease.
• The UK and France continued to rely heavily on repos, which accounted for a large portion of their encumbrance.
• The Nordic countries and Germany had high encumbrance levels due to the prevalence of covered bonds.

Main Views

• The asset encumbrance ratio has remained stable in 2018, showing a pause in the long-term upward trend.
• Repos are the dominant source of encumbrance, with their share increasing from 27% to 30% in 2018.
• Central bank funding is becoming less important, particularly in countries that have improved their financial stability.
• Covered bonds remain a key source of encumbrance, especially in countries with well-established markets.
• Overcollateralisation levels vary widely across countries, with some showing extremely high OC and others low.
• The dispersion of encumbrance levels across the EU is a key concern, as it highlights differences in banking structures and funding practices.

Key Information

• Total assets and collateral received in the EU reached EUR 32.3 trillion in 2018.
• The weighted average asset encumbrance ratio was 27.9%, with a slight increase in encumbered collateral (up 9%) and a small decrease in encumbered assets (down 3%).
• Debt securities are the most common type of encumbered asset, while loans and advances (excluding loans on demand) are the second most common.
• Encumbrance by maturity shows that 58% of encumbered assets and collateral had a maturity of less than 3 months, indicating a shift towards short-term funding.
• The EU covered bond framework was finalized in April 2019, aiming to harmonize rules and improve transparency and protection for investors.

Conclusion

The report concludes that while the overall asset encumbrance ratio has remained stable, there are notable variations across countries. These variations are linked to differences in banking structures, reliance on central bank funding, and the use of repos and covered bonds. The stability of the ratio in 2018 is a positive sign, but continued monitoring is essential to ensure the resilience of the EU banking sector and the sustainability of its funding sources.