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Asset Encumbrance (EBA)

Also known as pledging or earmarking, asset encumbrance is the process banks go through to secure or collateralize a claim. In accounting, it refers to restricted funds that are reserved for a specific liability. Banks must specify assets that creditors can take possession of if the bank fails to meet its commitments. In the case that a borrower defaults, the lender has the ability to liquidate the asset/collateral in order to recover their cash.

Where does asset encumbrance occur? In transactions that are asset-backed. Some examples of this are market funding, insurance claims, repurchase agreements, securitizations, covered bonds, or derivatives.

Since the recession of 2008, asset encumbrance has understandably become more stringent, with stricter rules and requirements around collateralisation. Monitoring encumbrance levels has become an intrinsic part of banks’ decision making processes and is now frequently incorporated into their risk management initiatives.

Recent regulations from the European Banking Authority (EBA) require banks to report more thoroughly on their encumbrance levels and composition, so that institutions and regulations have more transparency. The challenge to banks? To ensure risk management strategies are up to task and reporting mechanisms are capable of fulfilling requirements and meeting deadlines.

Discover how CCH Tagetik Performance Management Software delivers:

EBA Supervisory Reporting