We explore the relationship between asset encumbrance and bank funding in the context of covered bonds a form of collateralized debt. Covered bond issuance influences the incidence of bank runs by unsecured creditors and, in turn, conditions in the unsecured funding market influence the bank s...

We examine the safety of government bonds in the presence of Knightian uncertainty amongst financial market participants. In our model, the information insensitivity of government bonds is driven by strategic complementarities across counterparties and the structure of trading relationships. We...

We propose a model of asset encumbrance by banks subject to rollover risk and study the consequences for fragility, funding costs, and prudential regulation. A bank's choice of encumbrance trades off the benefit of expanding profitable investment funded by cheap long-term secured debt against...

We offer an analytical framework for studying "pre-emptive" debt exchanges. Countries can tailor a sovereign bankruptcy framework by choosing provisions (or "haircuts") ex ante, but must contend with the market discipline of holdout litigation ex post. Secondary markets play a role in shaping...

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...

Why do politicians sometimes pursue policies with uncertain outcomes? We present a model in which politicians are unable to pre-commit to a status quo policy, and where investors and voters face a conflict over the division of output. Politicians may deviate from the status quo and pursue risky...

This report argues that, in addition, financial regulation should be robust in the sense of being able to preserve its effectiveness when confronted with hard-to-predict developments and innovations. System robustness refers to the capacity of a system to maintain its core functions in the face...

Cyber attacks can impair banks operations and precipitate bank runs. When digital infrastructure is shared, banks defend themselves by investing in cybersecurity but can free-ride on the security measures of others. Ex ante free-riding by banks interacts with the ex post coordination frictions...

How does asset encumbrance affect the fragility of intermediaries subject to rollover risk? We offer a model of covered bonds that features the bankruptcy remoteness and replenishment of the asset pool that backs secured funding. Encumbering assets allows a bank to raise cheap secured debt and...

We examine the role of macroeconomic fluctuations, asset market liquidity, and network structure in determining contagion and aggregate losses in a financial system. Systemic instability is explored in a financial network comprising three distinct, but interconnected, sets of agents - domestic...