Covered bonds and bank portfolio rebalancing

Jin Cao, Ragnar E. Juelsrud, Talina Sondershaus

Research output: Working paper/PreprintWorking paper

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.
Original languageEnglish
ISBN (Electronic)978-82-8379-201-0
Publication statusPublished - 2021 Sept 9
Externally publishedYes

Publication series

NameNorges Bank Working Paper Series
PublisherNorges Bank
No.6
Volume2021

Subject classification (UKÄ)

  • Economics

Free keywords

  • Asset encumbrance
  • Covered bond
  • Portfolio rebalancing
  • Liquidity management
  • G21
  • G23
  • G28

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