Covered bonds and securitization in the United States: bank liquidity, contracting, and regulation
This dissertation explores how and to what extent regulations and contractual covenants impact the pricing of securitized assets and value as a source of financing. The first essay exploits the unique structure and regulatory treatment of U.S. covered bonds to examine the impact of regulatory uncertainty on bond prices. We find that investors require an incremental spread as compensation for uncertainty about the legal status of covered bonds in the event of default. The spread occurs because regulatory outcomes may adversely impact cash flows to investors, and it is not driven by traditional measures of systematic risk. The second essay empirically tests optimal security design in commercial mortgage backed security (CMBS) markets. Focusing on the role of the B-piece investor, this essay examines the link between risk retention, incentives to screen, and the loss severity of CMBS collateral pools. We find that ex-ante B-piece investor characteristics and deal structure both help to predict ex-post loss severity.