UK: Asset Encumbrance: The Elephant In The Room?

Asset encumbrance, also known as earmarking or pledging assets, refers to the existence of bank assets securing liabilities in the event that an institution fails to meet its financial obligations. It originates from transactions that are typically collateralised or asset-backed, such as repurchase agreements, securitisations, covered bonds, or derivatives.

Asset encumbrance not only poses risks to unsecured creditors that are unable to benefit from the liquidation of encumbered assets in case of insolvency, but also has wider stability implications since encumbered assets are generally not available to obtain emergency liquidity in case of an unforeseen stress event.

Since the recession, the level of asset encumbrance has rapidly increased, reflecting more stringent collateralisation requirements, especially on over-the-counter (OTC) derivative markets, and increased reliance on secured funding. From 2007 to 2011, the average asset encumbrance ratio of encumbered assets over total assets increased from 11% to 32%, according to the European Systemic Risk Board ("Recommendation of the European Systemic Risk Board of 20th December 2012 on funding of credit institutions" (ESRB/2012/2), February 2013).

As such, the topic has gained prominence in the regulatory community, with central banks and supervisors increasingly focusing on monitoring encumbrance levels and ensuring that institutions consider asset encumbrance a key component of their risk management and decision making processes.

The European Banking Authority (EBA) has recently published draft Implementing Technical Standards requiring the reporting of a number of regulatory returns on Asset Encumbrance, and public disclosure of Asset Encumbrance information within Pillar 3. The Prudential Regulation Authority (PRA) has also introduced related amendments to its Liquidity Standards as outlined in BIPRU 12.

The changes should help both institutions and regulators alike to understand the level and composition of encumbrance. The priority now for firms is to ensure that their risk management and reporting systems are sufficiently robust and prepared to meet the designated deadlines.

EBA reporting and Pillar 3 disclosures

The current draft EBA Implementing Technical Standards, developed under the remit of the CRD IV package, require firms to submit up to nine reporting templates. The information requested to all firms includes amounts of encumbered and unencumbered assets and collateral by product type, details of the firm's liabilities that generate encumbrance by transaction type, and issuance of covered bonds, among others. More advanced reporting templates covering maturity data or contingent encumbrance need to be reported by firms with total assets exceeding 30bn euro and with an asset encumbrance ratio higher than 15%. All the templates are required to be completed using December 2014 data, with first submission on 11 February 2015.

The EBA standards introduce the concept of 'contingent encumbrance' which refers to the additional assets which a firm may need to pledge when facing adverse developments triggered by an external event over which it has no control (e.g. a downgrade, decrease of the fair value of the encumbered assets, or a general loss of confidence). For the contingent encumbrance return, the EBA has provided two alternative scenarios including a drop in the fair value of encumbered assets and a depreciation of significant currencies, with firms being required to report the amount of additional collateral required in each separately, taking into account existing levels of overcollateralization and contractual requirements including threshold triggers.

Firms will also have to report a range of Asset Encumbrance information following a standard format in their published Pillar 3 disclosures, in addition to current IFRS 7 disclosure requirements, including three disclosures which are condensed versions of the EBA reporting templates, and an additional disclosure covering detailed business narrative.

Changes to UK PRA rules in BIPRU 12

The PRA proposed a number of amendments to BIPRU 12 relating to Asset Encumbrance on its March Occasional CP5/14. The consultation closed in April and the final instrument came into force on 26 May 2014.

Broadly, the following requirements have been introduced:

  • establishment of approach for asset encumbrance by the governing body including regular review and approval
  • risk management, monitoring and active management of the asset encumbrance position
  • provision of information to the governing body and senior management regarding the amount, evolution and types of additional encumbrance resulting from stress scenarios (contingent encumbrance)
  • incorporating asset encumbrance into stress testing scenarios outlined in BIPRU 12.3 and 12.4
  • incorporating strategies to address asset encumbrance into the firm's contingency funding and recovery and resolution plans

Line by line changes to BIPRU 12 can be found in appendix 4 of Policy Statement PS4/14.

How firms can prepare

Firms will need to make sure that any enhancements to their risk management and reporting systems are robust and enable compliance with the new requirements, ensuring that data challenges are addressed early in order to meet the reporting deadlines, and implementing the new PRA requirements.

Close attention should be paid to the wider interactions with other regulatory liquidity requirements, such as contingent encumbrance and liquidity risk stress tests. In this sense, the firm's policies and documentation, including the ILAA, may also need to be updated. Appropriate timescales for any enhancements necessary to comply with rules and guidance need to be discussed and agreed with the firm's supervisors.

Firms should also consider the overlap with wider reporting requirements in FINREP, the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) as instances of cross-validation and common approaches to data, reporting and IT implications need to be taken into account.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions