The Pricing of Bank Bonds, Sovereign Credit Risk and ECB’s Asset Purchase Programmes

58 Pages Posted: 4 Nov 2020

See all articles by Ricardo Branco

Ricardo Branco

Catholic University of Portugal (UCP) - Católica Porto Business School

João Pinto

Universidade Católica Portuguesa, Católica Porto Business School and CEGE

Ricardo M. Ribeiro

Universidade Católica Portuguesa, Católica Porto Business School

Date Written: September 15, 2020

Abstract

The 2008 Global financial crisis and the subsequent European sovereign debt crisis deteriorated banks funding conditions and lead to a substitution effect among bond instruments. We examine the pricing of straight, covered and securitization bonds issued by European banks in the 2000-2016 period, with a particular focus on the effect of sovereign credit risk and ECB’s asset purchase programmes on spreads. We find that (i) straight, covered and securitization bonds are priced in segmented markets, (ii) the impact of common pricing determinants on spreads differ significantly between non-crisis and crisis periods, (iii) sovereign credit risk is an important determinant of banks’ cost of funding, especially in crisis periods, (iv) ECB’s asset purchase programmes exhibited mixed effectiveness in improving banks funding conditions, (v) contractual bond characteristics other than credit ratings, macroeconomic factors and bank characteristics are important determinants of spreads, and (vi) there is evidence of heterogeneity across countries.

Keywords: Straight Bonds; Covered Bonds; Securitization Bonds; Bond Pricing; Sovereign Risk; Asset Purchase Programmes

JEL Classification: E52; G01; G12; G21; G32

Suggested Citation

Branco, Ricardo and Pinto, João M. and Ribeiro, Ricardo, The Pricing of Bank Bonds, Sovereign Credit Risk and ECB’s Asset Purchase Programmes (September 15, 2020). Available at SSRN: https://ssrn.com/abstract=3691310 or http://dx.doi.org/10.2139/ssrn.3691310

Ricardo Branco

Catholic University of Portugal (UCP) - Católica Porto Business School ( email )

Rua de Diogo Botelho 1327
Porto, Porto 4169-005
Portugal

João M. Pinto (Contact Author)

Universidade Católica Portuguesa, Católica Porto Business School and CEGE ( email )

Rua Diogo de Botelho, 1327
Porto, 4169-005
Portugal
+351 22 619 62 00 (Phone)

HOME PAGE: http://www.porto.ucp.pt/

Ricardo Ribeiro

Universidade Católica Portuguesa, Católica Porto Business School ( email )

Rua Diogo Botelho, 1327
Porto, 4169-005
Portugal
+351-22619-6200 (Phone)
+351-22619-6291 (Fax)

HOME PAGE: http://ricardomribeiro.github.io/

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