The word 'encumbrance' has received a lot of headlines in the last few months - and rightfully so - after we pointed out the impact that LTROs had in subordinating senior creditors of European banks. As Morgan Stanley points out, this is a considerable problem for bondholders as 'in a wind-down scenario, senior unsecured holders have recourse to fewer assets and hence face a higher loss given default (LGD)'. In understanding just how bad things are for European banks, it is important to focus on 'how much loss-absorbing capital there is beneath you in the bank’s liability stack, as this is the capital that will take ... (full story)