The effect of covered bonds : high encumbrance in banks : a game changer for senior unsecured debt investors?

Abstract

This study examines the effect covered bonds have on the senior bondholders. We discuss how this new funding method is affecting the banks' balances and to which extent the senior bonds credit spread is influenced by different factors. The results show that the senior bondholders and depositors are experiencing a much higher level of risk towards corporate loans than before the transfer of mortgages. This new risk is reflected in the increased credit spread for senior bonds. As banks continue to transfer more of their mortgages, so does the risk continue to increase. Our analysis of the senior bond credit spread shows that the return of equity (ROE) has a significant effect on the credit spread. We have found no evidence that size has an effect on the credit spread