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

Next to deposits, European banks have, unlike their US counterparties which heavily rely on securitization to fund mortgages, historically largely used bank obligations such as covered bonds and senior unsecured bonds. We assess the decision of 402 European banks between 2006 and 2014 to issue three types of bonds – (private label) mortgage backed securities (MBS), covered bonds (CB) and senior unsecured bonds (SUB) – to account for balance-sheet substitution effects and their underlying channels. We estimate conditional probit and tobit models to simultaneously account for the choice between the three securities implying dependence between the decisions to issue either instrument. We show evidence for substitution through a funding liquidity channel; banks with more liquid balance sheets would choose to issue less CB and MBS whereas banks with high balance sheet maturity mismatch would choose to issue more MBS. There are substitution effects also for banks which more heavily rely on deposits issuing less CB and SUB. Overall, there is a higher probability to issue non-agency MBS in Europe by banks with high reliance on deposits, less risky loan portfolios, and high maturity mismatch prompting to a different role of this instrument in European bank funding as compared to the US. Most of the above effects vanish for the crisis period suggesting that banks’ funding decisions may have been driven by unobserved factors.