International issuance of mortgage-backed bonds

BIS Quarterly Review  | 
02 March 2009

(Extract from page 25 of BIS Quarterly Review, March 2009)

Mortgage-backed international bond issuance by industrial countries has swung dramatically since the onset of the financial turmoil in mid-2007 (Graph A, left-hand panel). By the first quarter of 2008, it had fallen to less than one third of the peak in the second quarter of 2007. But in the second quarter the trend was reversed, chiefly driven by the large rebound in issuance by UK nationals. In the fourth quarter, aggregate issuance of mortgage-backed bonds reached the highest level ever, reflecting increased borrowing by nationals of a wide range of European countries including the United Kingdom, Spain, Germany, Italy and Belgium. Net issuance figures that take account of repayments show changes of similar magnitude.

The surge by UK issuers followed the implementation of the Special Liquidity Scheme by the Bank of England in April 2008. This enabled UK banks (and building societies) to swap currently illiquid high-quality assets such as mortgage-backed securities for UK Treasury bills for up to three years. The drawdown period, which was initially scheduled to run until end-October 2008, was subsequently extended to end-January 2009. The usage of this scheme amounted to £185 billion ($263 billion) of Treasury bills.

The later surge in issuance across Europe followed the deepening of the financial crisis after the failure of Lehman Brothers in September 2008. In subsequent months, many European countries announced temporary rescue plans to support banks and unfreeze credit markets.1 The rapid and substantial increase in mortgage-backed bond issuance in these European countries coincided with the introduction of these government-led policy initiatives. The rescue plans include asset purchase programmes (Germany, Spain), through which governments purchase illiquid and distressed assets on the banks' balance sheets, swap facilities similar to the one introduced in the United Kingdom (Italy, Spain), and government guarantees of new debt issuance (Belgium, Germany, Italy, Spain). Amid the continued slump in the overall credit market, the share of mortgage-backed bonds in the total gross issuance of international bonds has reached all-time peaks in Belgium (92%), Spain (68%), Italy (56%) and Germany (33%) (Graph A, right-hand panel).

1 See D Domanski and S Ramaswamy, "Government-led bank rescue initiatives", BIS Quarterly Review, December 2008, p 10.