18 January 2021

EBA observes an increase in the asset encumbrance ratio amidst extensive use of central bank facilities

After decreasing by 80bp in 2019 to 25%, in the first half of 2020, the asset encumbrance ratio went up to 27.5%.In the first half of 2020, the volume of total assets and collateral received rose by almost 10% while encumbered assets and collateral increased by more than 20%

The European Banking Authority (EBA) published today its annual report on Asset Encumbrance. As COVID-19 spread across Europe and activity in primary markets froze, banks made extensive use of central bank liquidity facilities to build precautionary liquidity buffers. In this context, the asset encumbrance ratio rose substantially in the first half of 2020.

Overview of key figures

	Asset Encumbrance ratio	Encumbrance ratio of central bank eligible assets
Q2 2020	27.5%	49.3%
Q4 2019	25.0%	44.4%
Q4 2018	25.8%	44.9%

 

The extensive use of the extraordinary central bank liquidity facilities in 2020 has driven up the share of central bank funding over total sources of encumbrance. 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 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.

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, banks’ capacity to further make use of central bank funding when necessary should be monitored.

Notes to editors

Following the United Kingdom’s departure from the EU, banks domiciled in this country are not included in the figures based on supervisory reporting data for the current year. For previous years, EU-27/respective EEA pro-forma data are accordingly used to make consistent comparisons.

EBA

© EBA