How does asset encumbrance affect the fragility of intermediaries subject to rollover risk? We offer a model in which a bank issues covered bonds backed by a pool of assets that is bankruptcy remote and replenished following losses. Encumbering assets allows a bank to raise cheap secured debt...

In this paper, we use detailed data on the sovereign debt holdings of all German banks to analyse the determinants of sovereign debt exposures and the implications of sovereign exposures for bank risk. Our main findings are as follows. First, sovereign bond holdings are heterogeneous across...

In this paper, we analyze the impact of loan growth and business model on bank risk in 15 EU countries. In contrast to the literature, we include a large number of unlisted banks in our sample which represent the majority of banks in the EU. We show that banks with high rates of loan growth are...

In attempting to promote bank stability, the Basel Committee on Banking Supervision (2006) provides a framework that seeks to control the amount of tail risk that large banks take in their trading books. However, banks around the world suffered sizeable trading losses during the recent crisis....

This paper studies the impact of bank regulation and taxation in a dynamic model where banks are exposed to credit and liquidity risk and can resolve financial distress in three costly forms: bond issuance, equity issuance or fire sales. We find an inverted U-shaped relationship between capital...

We propose an algorithm to model contagion in the interbank market via what we term the credit quality channel. In existing models on contagion via interbank credit, external shocks to banks often spread to other banks only in case of a default. In contrast, shocks are transmitted via asset...

This paper provides evidence for regulatory arbitrage within the class of assetbacked securities (ABS) based on individual asset holding data of German banks. I find that those banks operating with tight regulatory constraints pick the securities with the highest yield and lowest collateral...

In Europe, the financial stability mandate generally rests at the national level. But there is an important exception. Since the establishment of the Banking Union in 2014, the European Central Bank (ECB) can impose stricter regulations than the national regulator. The precondition is that the...

We show that banks' risk exposure in one asset category affects how they report regulatory risk weights for another asset category. Specifically, banks report lower credit risk weights for their loan portfolio when they face higher risk exposure in their trading book. This relationship is...

A bank's decision on loan supply and capital structure determines its immediate bankruptcy risk as well as the future availability of internal funds. These internal funds in turn determine a bank's future costs of external finance and future vulnerability to bankruptcy risks. We study these...