Indeed, asset encumbrance makes balance sheets more complex and poses significant challenges to investors in assessing banks’ riskiness, which may result in higher risk premia for unsecured debt, especially at a time where the overall demand for collateral assets is expected to increase.5 Moreover, we need to consider the effect on the overall cost of funding from the strengthening of depositor protection, which has a potential to reduce the relative interest rate paid on deposits compared to unsecured debt.
The way of thinking about monetary policy management has certainly changed since the outbreak of global financial market turmoil in the summer of 2007. In particular, since the collapse of Lehman Brothers in September last year, the policy discussions have changed further with the first-hand experiences of the downward spiral in both the financial and real sectors of the economy.