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Covered bonds and bank portfolio rebalancing

Cao, Jin ; E. Juelsrud, Ragnar and Sondershaus, Talina LU (2021) In Norges Bank Working Paper Series 2021(6).
Abstract
We use administrative and supervisory data at the bank and loan level to investigate the impact of the introduction of covered bonds on the composition of bank alance sheets and bank risk. Covered bonds, despite being collateralized by mortgages, lead to a shift in bank lending from mortgages to corporate loans. Young and low-rated firms in particular receive more credit, suggesting that overall credit risk increases. At the same time, we find that total balance sheet liquidity increases. We identify the channel in a theoretical model and provide empirical evidence: Banks with low initial liquidity and banks with sufficiently high risk-adjusted return on firm lending drive the results.
Please use this url to cite or link to this publication:
author
; and
publishing date
type
Working paper/Preprint
publication status
published
subject
keywords
Asset encumbrance, Covered bond, Portfolio rebalancing, Liquidity management, G21, G23, G28
in
Norges Bank Working Paper Series
volume
2021
issue
6
ISBN
978-82-8379-201-0
language
English
LU publication?
no
id
bf04d0b3-44b0-4f29-b4ff-5688448cf1b8
alternative location
https://www.norges-bank.no/contentassets/3ec090cca40e407e9d340ade214a918b/wp_06_2021.pdf?v=09/09/2021161515&ft=.pdf
date added to LUP
2022-09-21 11:49:19
date last changed
2022-11-07 15:38:57
@misc{bf04d0b3-44b0-4f29-b4ff-5688448cf1b8,
  abstract     = {{We use administrative and supervisory data at the bank and loan level to investigate the impact of the introduction of covered bonds on the composition of bank  alance sheets and bank risk. Covered bonds, despite being collateralized by mortgages, lead to a shift in bank lending from mortgages to corporate loans. Young and low-rated firms in particular receive more credit, suggesting that overall credit risk increases. At the same time, we find that total balance sheet liquidity increases. We identify the channel in a theoretical model and provide empirical evidence: Banks  with low initial liquidity and banks with sufficiently high risk-adjusted return on firm lending drive the results.}},
  author       = {{Cao, Jin and E. Juelsrud, Ragnar and Sondershaus, Talina}},
  isbn         = {{978-82-8379-201-0}},
  keywords     = {{Asset encumbrance; Covered bond; Portfolio rebalancing; Liquidity management; G21; G23; G28}},
  language     = {{eng}},
  month        = {{09}},
  note         = {{Working Paper}},
  number       = {{6}},
  series       = {{Norges Bank Working Paper Series}},
  title        = {{Covered bonds and bank portfolio rebalancing}},
  url          = {{https://www.norges-bank.no/contentassets/3ec090cca40e407e9d340ade214a918b/wp_06_2021.pdf?v=09/09/2021161515&ft=.pdf}},
  volume       = {{2021}},
  year         = {{2021}},
}