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Asset encumbrance, size distribution and liquidity provision: Three essays on banking

Benito Ruiz, E. (2018). Asset encumbrance, size distribution and liquidity provision: Three essays on banking. (Unpublished Doctoral thesis, City, Universtiy of London)


This thesis presents three papers in the field of banking.

The first paper considers ‘asset encumbrance’ which refers to the existence of bank balance sheet assets being subject to arrangements that restrict the bank’s ability to freely transfer or realise them. Asset encumbrance has recently become a much discussed subject and policymakers have been actively addressing what some consider to be excessive levels of asset encumbrance. Despite its importance, the phenomenon of asset encumbrance remains poorly understood. I build a novel dataset of asset encumbrance metrics based on information provided in the banks’ public disclosures for the very first time throughout 2015. The study then provides descriptive evidence of asset encumbrance levels by country, credit quality, and business model using different encumbrance metrics. The empirical results point to the existence of an association between CDS premia and asset encumbrance that is negative, not positive. That is, on average encumbrance is perceived to be beneficial. Still, certain bank-level variables play a mediating role in this relationship. For banks that have high exposures to the central bank, high leverage ratio, and/or are located in southern Europe, asset encumbrance is less beneficial and could even be detrimental in absolute terms.

The second paper investigates the size distribution of the whole population of Spanish commercial, savings and cooperative banks from a dynamic perspective over the 1970-2006 period. To investigate the evolution of the size distribution, the study determines whether the data is in line with the Law of Proportionate Effect (LPE) using panel unit root tests. A key finding is that the size-growth relationship is not stable over time but changes depending on the competitive environment of banks (liberalization, deregulation and integration). When Spanish banking was highly regulated we find that smaller banks grew faster than their larger counterparts. In recent years, however, we find that larger banks grow at the same rate or faster than smaller banks, a result that lend towards LPE acceptance. Thus, the study corroborates the conditioned nature of the size-growth relationship and the size distribution of banks, as emphasized by studies of the US banking system.

Finally, the third paper investigates, from a theoretical perspective, the roles of banks and markets when both are active, there is limited participation in markets, and there exists liquidity and technology risk in the economy. In a model where banks and markets co-exist and banks are subject to runs, we show that the levels of aggregate risk and limited participation jointly determine the superiority of the mixed (market and bank deposits) economy over pure equity contracts. The study finds that if aggregate risk exceeds a certain threshold then markets may perform better than banks even for low or null levels of market participation, and it is shown that markets may perform better than banks the lower the market participation under some circumstances. The results imply that the level of bank risk taking cannot be considered in isolation, but in conjunction with the availability and access of banking and non-banking options.

Publication Type: Thesis (Doctoral)
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HC Economic History and Conditions
Departments: Doctoral Theses
School of Policy & Global Affairs > Economics
Doctoral Theses > School of Arts and Social Sciences Doctoral Theses
School of Policy & Global Affairs > School of Policy & Global Affairs Doctoral Theses
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