The asset encumbrance ratio of the EU banking sector decreased last year, reaching 25.8%, which is close to the average pre-pandemic levels, while Luxembourg’s ratio remained below the European average. Photo: European Banking Authority

The asset encumbrance ratio of the EU banking sector decreased last year, reaching 25.8%, which is close to the average pre-pandemic levels, while Luxembourg’s ratio remained below the European average. Photo: European Banking Authority

European banks decreased their reliance on central bank funding in 2022, resulting in a 3.3 percentage point decrease in the overall encumbrance ratio to 25.8%, the European Banking Authority has revealed.

The amount that banks across the EU blocked as collateral has dropped to near pre-pandemic levels, although the figure for Luxembourg rose mildly, according to the European Banking Authority’s annual asset encumbrance report.

The report, published on Monday 17 July 2023, is based on a sample of 162 banks as of December 2022, covering over 80% of the EU and European Economic Area banking sector in terms of total assets.

A lower asset encumbrance ratio indicates a smaller portion of a bank’s assets being tied up as collateral, potentially providing more freedom and flexibility in managing obligations.

Encumbrance ratio down to 25.8%

The decrease in the ratio was due to both a decrease in encumbered assets and collateral received by 7.3% (€640bn) and an increase in total assets and collateral received by 4.6% (€1.4trn).

Some large jurisdictions such as Germany, France and Italy, as well as certain Nordic countries like Denmark and Finland, maintained comparably higher encumbrance ratios.

In Denmark and Finland, the high ratios were primarily due to an extensive use of covered bond funding, while in Italy, central bank funding was the main source of encumbrance.

Germany and France had more diverse sources of encumbrance, with repurchase agreements funding prevailing.

In Luxembourg, the encumbrance ratio slightly increased from 7.2% in 2021 to 8.1% in 2022, although it remained substantially lower than the EU average (25.8%).

Higher repayments

European banks reduced their reliance on central bank funding by central bank facilities, prompted by tighter monetary policies implemented to alleviate inflation pressures.

Repurchase agreements became the major source of encumbrance, followed by covered bonds and central bank funding.

The overcollateralisation (OC) level decreased slightly by 1 percentage point to 115.3% as of December 2022.

However, banks reported a significant increase in overcollateralisation of central bank funding, attributed to collateral valuation changes from higher interest rates and an increased use of credit claims and asset-backed securities as collateral with higher haircuts.

Lower liabilities

Access to central bank funding remains crucial for EU banks during times of market stress and turmoil. With reduced liabilities towards central bank funding, EU banks reported an increase in their unencumbered central bank-eligible assets and collateral by over €700bn to €5trn (or 17.5% of their total assets and collateral).

The maturity profile of encumbered assets and collateral continued to be influenced by extensive central bank facility use and geopolitical tensions, such as a major shift to overnight facilities following the aftermath of the Russian invasion, which later reversed towards the end of the year.

The full report is available .

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