Are Covered Bonds a Substitute for Mortgage-Backed Securities?

41 Pages Posted: 8 Dec 2011 Last revised: 15 Mar 2012

See all articles by Santiago Carbo-Valverde

Santiago Carbo-Valverde

Bangor Business School; Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF)

Richard J. Rosen

Federal Reserve Bank of Chicago - Economic Research

Francisco Rodriguez-Fernandez

University of Granada - Department of Economic Theory and History

Multiple version iconThere are 2 versions of this paper

Date Written: March 2012

Abstract

Covered bonds and mortgage-backed securities both allow mortgages to be financed with duration-matched bonds. Given the problems in the MBS market during the financial crisis, some suggest that CB might be a substitute for MBS. We examine the use of CB and MBS in the U.S. and Europe, finding that the two are used for different purposes. Banks are more likely to use CB to help with liquidity needs while MBS are associated with risk management and agency problems. Introducing MBS to markets where only CB are common or CB to markets where only MBS are common could have large effects. Our estimates suggest that between 20-25% of banks in Germany and the U.S. would switch from CB to MBS (Germany) or MBS to CB (U.S.) if access was similar to that in countries where both CB and MBS are common (Spain and the U.K.).

Keywords: Covered bonds, mortgage-backed securities

JEL Classification: G21, G28, R28

Suggested Citation

Carbo-Valverde, Santiago and Rosen, Richard J. and Rodriguez-Fernandez, Francisco, Are Covered Bonds a Substitute for Mortgage-Backed Securities? (March 2012). FRB of Chicago Working Paper No. 2011-14. Available at SSRN: https://ssrn.com/abstract=1969550 or http://dx.doi.org/10.2139/ssrn.1969550

Santiago Carbo-Valverde

Bangor Business School ( email )

Bangor Business School
College Road
Gwynedd LL57 2DG, Wales LL57 2DG
United Kingdom

Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF) ( email )

Serrano Anguita 9
Madrid, Madrid 28004
Spain

Richard J. Rosen (Contact Author)

Federal Reserve Bank of Chicago - Economic Research ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-6368 (Phone)
312-294-6262 (Fax)

Francisco Rodriguez-Fernandez

University of Granada - Department of Economic Theory and History ( email )

Granada
Spain

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