Are Covered Bonds a Substitute for Mortgaged-Back Securities?

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, MBS, issuance, banks

JEL Classification: G21