The Use of Mortgage Covered Bonds

IMF Working Papers, January 1, 2007

Source details

Authors: Renzo G Avesani, Elina Ribakova
Date: January 1, 2007
Core observation: Rapid mortgage credit growth in mature and emerging countries has raised stability concerns.
Primary focus: Examination of the two largest "jumbo" covered bond markets, Germany and Spain.
Principal argument: Movements in covered bond prices can be used to analyze the credit developments of the underlying issuer and the quality of its mortgage portfolio.
Additional inference: Mortgage covered bonds could be of interest to other mature and emerging markets facing similar risks related to mortgage credit.

Market dynamics:
- Many European credit institutions in mature markets have reacted to rapid mortgage credit growth by increasing securitization, particularly via mortgage covered bonds.
Issuer perspective:
- Covered bonds have become an attractive funding source and a tool for asset–liability management.
Investor perspective:
- Covered bonds enjoy a favorable risk-return profile and a very liquid market.
Analytical use:
- Movements in covered bond prices can serve as indicators of:
- Credit developments of the underlying issuer.
- Quality of the issuer's mortgage portfolio.
Geographic focus:
- Detailed examination of Germany and Spain as the two largest "jumbo" covered bond markets.
Suggested applicability:
- Mortgage covered bonds may be relevant for other mature and emerging markets with similar mortgage-credit risks.

For issuers:
- Consider mortgage covered bonds as a funding and asset–liability management tool where appropriate.
For supervisors and policymakers:
- Monitor covered bond price movements as market-based indicators of issuer creditworthiness and mortgage-portfolio quality.
For emerging markets:
- Assess the potential role of mortgage covered bonds in addressing elevated mortgage-credit growth and associated stability concerns.