Sovereign Market Tensions and Covered Bond Issuances

Abstract

The purpose of this paper is to test whether tensions in the sovereign of the 5 largest euro area Member States had an impact on the funding sources of the most relevant banks based in these Member States and more specically, on the issuance of covered bonds. This could constitute additional proof of the existence of the feedback loop between sovereigns and banks. To this end, we use several econometric methodologies like panel, VAR and ProbVAR models to analyze the impact an increase in the 10 year sovereign bond yield has on the amount of covered bonds issued and the probability to issue covered bonds by these banks. The results of the panel model indicate that the amount and probability of issuing covered bonds increase when sovereign bond yields soar in times of economic stress and not in times of more stability. The VAR and ProbVAR models confirm the results of the panel model for the cases of Germany, Spain and the Netherlands on the one hand and for Germany, Italy, Spain and the Netherlands on the other hand. On the basis of these results, relevant policy implications can be drawn in terms of the diversification of the funding sources of credit institutions and the finalization of the projects of the Banking Union and the Capital Markets Union.