An encumbrance is a right over an asset, enjoyed by someone other than the owner of the asset.
Encumbrances prevent or restrict the owner's flexibility to use or dispose of the asset as freely as if it were unencumbered.
Liens and mortgages are examples of encumbrances.
For the purposes of bank liquidity liquidity regulation, an asset may be considered encumbered if:
- It has been pledged; or
- It is subject to any arrangement to secure, collateralise or credit enhance any transaction from which it cannot be freely withdrawn.