AFFI International Conference 2017

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Covered Bonds, Asset Encumbrance and Bank Risk: Evidence from the European Banking Industry

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We use cross-country data on a sample of 106 listed banks from 23 European countries over the 2004-2013 period to evaluate the effects of asset encumbrance linked to covered bond issuance on senior creditors’ and banks’ risk. We distinguish between the bank’s overall default risk (measured through its distance-to-default), senior creditors’ credit risk (proxied by the Senior CDS average spread), and the bank’s portfolio risk (measured by the bank asset risk). We report three main results. First, asset encumbrance increases bank overall default risk. Second, it produces structural subordination as it contributes to increase senior creditors’ credit risk. Third, asset encumbrance has no real effect on the portfolio risk.


Emilia Garcia-Appendini    
University of St. Gallen, School of Finance

Stefano Gatti    
Bocconi University, Department of Finance

Giacomo Nocera    
Audencia Business School, Institute of Finance


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