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WP/07/20 The Use of Mortgage Covered Bonds

The rapid mortgage credit growth experienced in recent years in mature and emerging countries has raised some stability concerns. Many European credit institutions in mature markets have reacted by increasing securitization, particularly via mortgage covered bonds. From the issuer’s perspective, these instruments have become an attractive funding source and a tool for assetliability management; from the investor’s perspective, covered bonds enjoy a favorable risk-return profile and a very liquid market. In this paper, we examine the two largest “jumbo” covered bond markets, Germany and Spain. We show how movements in covered bond prices can be used to analyze the credit developments of the underlying issuer and the. | The Use of Mortgage Covered Bonds Renzo G. Avesani Antonio García Pascual and Elina Ribakova INTERNATIONAL MONETARY FUND 2007 International Monetary Fund WP 07 20 IMF Working Paper Monetary and Capital Markets The Use of Mortgage Covered Bonds Prepared by Renzo G. Avesani Antonio Garcia Pascual and Elina Ribakova1 Authorized for distribution by David D. Marston January 2007 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author s and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author s and are published to elicit comments and to further debate. The rapid mortgage credit growth experienced in recent years in mature and emerging countries has raised some stability concerns. Many European credit institutions in mature markets have reacted by increasing securitization particularly via mortgage covered bonds. From the issuer s perspective these instruments have become an attractive funding source and a tool for assetliability management from the investor s perspective covered bonds enjoy a favorable risk-return profile and a very liquid market. In this paper we examine the two largest jumbo covered bond markets Germany and Spain. We show how movements in covered bond prices can be used to analyze the credit developments of the underlying issuer and the quality of its mortgage portfolio. Our analysis also suggests that mortgage covered bonds could be of interest to other mature and emerging markets facing similar risks related to mortgage credit. JEL Classification Numbers G10 G21. Keywords Mortgage covered bonds asset swap spreads market based indicators. Author s E-Mail Address r.avesani@unipol.it agarciapascual@imf.org eribaknonova@imf.org. 1 We are grateful to colleagues in the Monetary and Capital Markets department of the IMF for valuable comments and suggestions. Any remaining errors are our .