An asset that a bank or financial institution is prevented from disposing of in any form including liquidation, sale, transfer or assignment due to legal, regulatory, contractual or other restrictions or limitations. Restriction is usually meant to confine the asset to a particular use or mark it as a collateral for a bank’s obligations towards other parties. Encumbered assets are owned by an entity, but another entity or party has a legal claim to it.
Asset encumbrance (earmarking/ pledging) is the process banks undertake to secure or collateralize a claim for creditors. Specific assets are specified for restriction in order to allow creditors to take possession of should the bank default on its commitments. In the case of default, the lender has the right to liquidate the earmarked asset to recover their value from the cash proceeds.
Encumbered assets are also known as restricted assets.
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