Did the Covered Bond Issuance Act decrease the required yield of bonds issued to finance mortgage lending?

Sammanfattning: This paper examines the impact of the Covered Bond Issuance Act in Sweden. We argue that covered bonds exhibit a lower required yield than conventional mortgage bonds, which can reduce the financing cost of mortgage lending for banks. Using data on current yields for a sample of mortgage and covered bonds, we employ a difference-in-differences methodology to test the impact of the new legislation at five different dates where a drop in yields could be observed. We find a statistically significant decrease of 2-3 basis points at the date when covered bonds were first issued to the market. This suggests that the new regulatory framework contributed to a reduction in the mortgage lending financing cost for Swedish banks.