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Summary of EBA Report on Asset Encumbrance (September 2018)

Core Content

This report is the fourth annual EBA report on asset encumbrance, providing an analysis of the funding structure of European banks. It aims to monitor the composition of funding sources and aligns with the EBA's forward-looking analysis of banks' future funding plans. The report is based on data collected from December 2014 to December 2017, with a focus on the last two quarters (December 2016 to December 2017).

Main Points

• Asset Encumbrance Ratio: The weighted average asset encumbrance ratio increased slightly to 27.9% in December 2017 from 26.6% in 2016 and 25.4% in 2015. This increase is attributed to a decline in total assets rather than an increase in encumbered assets.

• Geographical Variations:

  • Countries with large and established covered bond markets (e.g., Denmark and Sweden) reported relatively high levels of encumbrance.
  • Countries affected by the sovereign debt crisis (e.g., Greece, Portugal, and Ireland) showed a decrease in encumbrance levels, though central bank funding as a source of encumbrance varied (decreased in Greece, increased in Cyprus, Ireland, Italy, and Spain).
  • The UK and France had higher shares of repos (40% and 31%, respectively) compared to the EU average of 27%.

• Asset Class Distribution:

  • Debt securities made up the largest portion of encumbered assets and collateral, at 45% in December 2017.
  • Loans and advances accounted for 39% of encumbered assets in 2017, down from 42% in 2016.
  • Unencumbered assets were mainly composed of loans and advances other than on demand, with a slight decrease in the share of other assets from 24% in 2016 to 20% in 2017.

• Sources of Encumbrance:

  • Repos remained the main source of encumbrance, accounting for 27% of the total in 2017.
  • Other sources of encumbrance increased from 23% in 2016 to 26% in 2017, becoming nearly as significant as repos.
  • Covered bonds decreased from 20% to 18%, reversing a previous upward trend.
  • Central bank funding increased slightly to 10.5% in 2017 from 8.5% in 2016, with mixed trends across countries.

• Collateral and Maturity:

  • The level of overcollateralisation increased from 105% to 109% in 2017, indicating that institutions are posting more collateral than required.
  • Assets with open maturity or short maturity (up to one week) accounted for the largest share of encumbered assets and collateral.
  • Medium-term maturity (2–3 years) saw a strong increase in encumbrance, while long-term maturity (3–10 years) decreased slightly, aligning with the decline in covered bonds.

Key Information

• Total Assets and Collateral: As of December 2017, the sample included EUR 32.1 trillion in total assets (encumbered and unencumbered) and EUR 5.8 trillion in collateral received.
• Sample Composition: The report includes data from 187 banks as of December 2017, representing a decrease from 195 banks in March 2015. The sample includes at least three banks from each country and all large banks, based on specific criteria such as total assets, consolidation level, and GDP share.
• Encumbrance by Country:
  • Denmark had the highest encumbrance ratio at 55%, while Estonia had the lowest at 1%.
  • Germany, France, and the UK contributed significantly to the overall increase in the asset encumbrance ratio due to their large size.
• Encumbrance by Asset Type:
  • Debt securities were the most common type of encumbered asset and collateral, followed by loans and advances.
  • Equity instruments showed a slight increase in encumbrance as both assets and collateral.
• Central Bank Eligibility:
  • Central bank-eligible assets had an encumbrance ratio of 47% in December 2017, up from 44% in 2016.
  • This ratio is used as a proxy for the marketability of assets, as not all unencumbered assets can be used for refinancing.

Conclusion

The increase in the asset encumbrance ratio in 2017 is not considered an immediate cause for concern, as it is largely due to a reduction in total assets. However, the report highlights the need to monitor changes in the use of central bank funding and the growing importance of 'other sources of encumbrance', which have become nearly as significant as repos. The report also underscores the importance of continued monitoring of encumbrance trends across the EU to understand their implications for access to unsecured instruments and overall funding stability.