Bank liquidity management through the issuance of bonds in the aftermath of the global financial crisis

Next to deposits, European banks have historically largely used bank obligations such as covered bonds. Their US counterparties, on the contrary, heavily rely on securitization to fund mortgages. We assess how banks’ liquidity and funding position during and after the Global Financial Crisis (GFC) affects the decision to issue (private label) mortgage backed securities (MBS), covered bonds (CB) or senior unsecured bonds (SUB). Since the decisions to issue either instrument are not necessarily independent from each other, we estimate conditional probit and tobit models in order to account for the simultaneous nature of the issuances. We see that neither instrument plays any role in liquidity management during the GFC. In the post-GFC period, banks reach out to issuing MBS when facing short-term illiquidity. Banks could issue MBS as a way to comply with Basel III liquidity regulations. In turn, a bank’s decision to issue CB is not affected by bank’s liquidity and liquidity management occurs instead through managing the amount of CB. The issuance of SUB is also not affected by liquidity. Overall, the paper shows that only MBS have actively been issued as a response to liquidity shortages of banks’ balance sheets and shows that MBS and CB, which often are seen as alternative instruments, serve different purposes.