Are covered bonds different from securitization bonds? A comparative analysis of credit spreads

This study compares credit spreads and the pricing of securitization and covered bonds. Using a sample of 18,309 bonds issued by European banks in the 2000-2016 period, we find that asset-backed securities (ABS), mortgage-backed securities (MBS), public covered bonds (PCB), and mortgage covered bonds (MCB) are priced differently. Our results show that investors rely on factors other than ratings in pricing such securities: although ratings are the most important pricing determinant for ABS and MBS, investors place relatively more importance on contractual, macroeconomic, and banks' characteristics rather than ratings in pricing covered bonds. ABS and MBS have higher credit spreads than similarly rated PCB and MCB, and security prices reflect information beyond credit ratings across asset classes. We find evidence supporting the hypothesis of ABS reducing banks' cost of funding. We also find that banks are more likely to issue MCB versus MBS for liquidity reasons, while banks that aim to meet regulatory capital requirements would prefer securitization