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CONTENTS:
1. Introduction 2. Credit Crunch 3. Covered Bonds 4. Basic Assumptions 5. Analysis * Covered Bonds and the Financial Crisis in Europe * Effect of Covered Bonds on Bank Margin * Covered Bond as a means of liquidity and funding base 6. Conclusion 7. References

Question 1
Does offering covered bonds hold the answer to credit rationing (credit crunch) in a financial crisis or does it just offer banks the opportunity to increase their margin? Discuss critically.

Introduction
In the US, credit crisis of 2007-2008 demolished the securitized mortgage bonds and many of the participants left the market never to recommit themselves in the near future. This lead to an drop in securitized debt issuance where the banks began to hoard cash and reduce consumer lending leading. The US Treasury to take measures to revitalise the financial market to encourage investors to buy loan from banks book. They shifted their focus onto the European Financial Market System which managed to minimise the impact of the credit crunch through its well established covered bond program.

Credit Crunch
Credit crunch is explained as a period of increased non price credit rationing beyond that of typical recessions whereby credit has become less affordable or less available. Owens, Schreft and Stacey,( 1995). To banks, this will result in a funding liquidity risk as “the possibility that over a specific horizon the bank will become unable to settle obligations with immediacy” Drehmann and Nikolaou(2013). With raising uncertainty during the GFC, corkage in flows of funds resulted in an economy stalemate. As funds froze, an illiquid bank is unable to meet its obligations and will become insolvent.

Covered bond
Covered Bond is a debt instrument secured against a pool of asset. Credit Institutions issue covered bonds as a part of their