Credit Risk in Covered Bonds
46 Pages Posted: 4 Oct 2010 Last revised: 29 Dec 2013
Date Written: March 2, 2012
Covered bonds are a promising alternative for prime mortgage securitization. In this paper, we explore risk premia in the covered bond market and particularly investigate whether and how credit risk is priced. In extant literature, yield spreads between high-quality covered bonds and government bonds are often interpreted as pure liquidity premia. In contrast, we show that although liquidity is important, it is not the exclusive risk factor. Using a hand-collected data set of cover pool information, we find that the credit quality of the cover assets is an important determinant of covered bond yield spreads. This effect is particular strong in times of financial turmoil and has a significant influence on the issuer's refinancing cost.
Keywords: Covered Bonds, Credit Risk, Cover Pool, Financial Crisis, Pfandbrief
JEL Classification: G01, G12, G21
Suggested Citation: Suggested Citation