Are Covered Bonds Different from Asset Securitization Bonds?

Jooo M Pinto,Mafalda Correia

doi:10.2139/ssrn.3045149

Abstract

This is the first study comparing the financial characteristics and pricing processes of asset securitization (AS) and covered bonds (CB). Using a sample of 6,191 AS bonds and 11,471 CB issued by Western European banks between January 1, 2000 and October 31, 2012, we find that AS and CB are not priced in integrated bond markets. Our results show that credit spreads are higher for ABS than for public CB in both pre- and crisis periods. Considering bonds backed by mortgages, we only find evidence of CB credit spreads being lower than those of AS bonds during the pre-crisis period. Both AS and CB credit spreads are driven by collateral type, credit rating is the most important pricing factor for AS bonds, and we document that not only specific effects related to issuance, but also macro factors and exogenous events are relevant drivers for CB credit spreads. Furthermore, while the first CB purchase programme led to lower mortgage CB credit spreads, the second programme did not have the ECB’s desired effects. Finally, we find that the ECB’s second programme reduces ABS spreads significantly for tranches issued by non-German banks.

Highlights

The transition from the traditional originate-to-hold model to the originate-to-distribute model, as well as its reliance on credit markets as a continuing source of credit, has been blamed by academics and practitioners for the 2007-2008 financial crisis [Brunnermeier (2009), Keys et al (2010), Demyanyk and Van Hemert (2011), Purnanandam (2011)]
When we compare asset securitization (AS) bonds with covered bonds (CB) considering the bond collateral--public loans (ABS and public covered bonds (PCB)) or mortgages (MBS and mortgage covered bonds (MCB))--we find that credit spreads are significantly higher for asset-backed securities (ABS) than for PCB in both pre- and crisis periods
We find that during the pre-crisis period credit spreads are significantly higher for ABS and mortgage-backed securities (MBS) than for PCB and MCB

Summary

Introduction

The transition from the traditional originate-to-hold model to the originate-to-distribute model, as well as its reliance on credit markets as a continuing source of credit, has been blamed by academics and practitioners for the 2007-2008 financial crisis [Brunnermeier (2009), Keys et al (2010), Demyanyk and Van Hemert (2011), Purnanandam (2011)]. CB are subject to tight regulatory control and are subject to preferential treatment under Basel III and Solvency II, which has increased its importance as a refinancing vehicle for European banks. This has led to several authors [Lucas et al (2008), Bernanke (2009), Surti (2010), Carbó-Valverde et al (2013)] proposing CB as a promising alternative to AS

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Conclusion