This study examines the relative liquidity of senior Asset Backed Securities (ABS) and Covered Bonds (CBs).
The analysis is based on bid-ask spread data on all securities in the two asset classes for which information is available on Bloomberg for the period 2010 to 2021.
Key findings are that while CB were generally more liquid in the early 2010s, since 2016, senior ABS have been consistently and generally more liquid even in the 2020 Covid-19 crisis.
The study builds on an earlier Risk Control analysis of ABS and CB liquidity, Perraudin (2014). Like that earlier analysis, we find that even in the European sovereign debt crisis period of 2011-14, the more liquid ABS were comparable in liquidity to the more liquid CB.
The significance of these findings is that ABS and CB are treated very differently in the current regulatory rules on bank liquidity, specifically the eligibility criteria for inclusion in bank Liquidity Coverage Ratios. The evidence provided here suggests that senior ABS should be included within higher LCR categories than is currently the case.
The study, commissioned by AFME, is available here.
You might also be interested in our related report on ABS and Covered Bond Risk and Solvency II Capital Charges.
