Safe and Liquid Mortgage Bonds: The Match Funding Principle
66 Pages Posted: 22 Dec 2015 Last revised: 3 Nov 2016
Date Written: November 1, 2016
This paper shows empirically that match pass-through funding of covered bonds supported by strong creditor rights provides safe and liquid mortgage bonds. Despite a 30% drop in house prices during the 2008 crisis these mortgage bonds remained as liquid as comparable government bonds. The match funding principle effectively eliminates credit risk from the covered bond investor's perspective and funding liquidity therefore becomes the main driver of market liquidity. These findings have implications for the treatment of covered bonds in capital regulation and for how to design a robust mortgage bond system without the need for government sponsoring.
Keywords: Mortgage bonds, Covered bonds, Housing crisis, Market design, Banking regulation, Financial intermediation
JEL Classification: E43, G12, G21
Suggested Citation: Suggested Citation