Uncovering the impact of regulatory uncertainty on credit spreads: A study of the U.S. covered bond experience

Karan Bhanot and Carl F. Larsson

Journal of Financial Markets, 2018, vol. 39, issue C, 84-110

Abstract: We examine how regulatory uncertainty impacts the credit spreads of covered bonds issued by U.S. domiciled banks. Using data on covered bonds issued by Washington Mutual and Bank of America, for the September 2006 to December 2016 period, we find that investors require an incremental spread that equals approximately half of the credit spread on unsecured benchmark bonds as compensation for uncertainty about the legal status of covered bonds in the event of default. Systematic and other risk factors cannot explain the magnitude of the regulatory spread. We draw broader lessons on how investors impound regulatory outcomes into asset prices.

Keywords: Regulatory uncertainty; Credit spreads; Covered bonds (search for similar items in EconPapers)
JEL-codes: G01 G12 G28 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:39:y:2018:i:c:p:84-110

DOI: 10.1016/j.finmar.2017.11.003

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