Safe and Liquid Mortgage Bonds: The Match Funding Principle

66 Pages Posted: 22 Dec 2015 Last revised: 3 Nov 2016

See all articles by Jens Dick-Nielsen

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance

Jacob Gyntelberg

Nordea Group; University of Copenhagen - Department of Economics

Date Written: November 1, 2016

Abstract

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

Dick-Nielsen, Jens and Gyntelberg, Jacob, Safe and Liquid Mortgage Bonds: The Match Funding Principle (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=2707016 or http://dx.doi.org/10.2139/ssrn.2707016

Jens Dick-Nielsen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Jacob Gyntelberg

Nordea Group ( email )

Grønjordsvej 10
Copenhagen, DK - 2300
Denmark

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5, Bygn 26
Copenhagen, 1353
Denmark

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