Deal Complexity, Default Risk and the Resilience of the Mortgage-Backed Securities Market

We study the impact that lower complexity in bank securitisations has on mortgage quality before and during the COVID-19 pandemic. We find that mortgages issued after the introduction of the new European regulation in 2018 that aims to reduce deal complexity are characterised by up to 0.10% lower delinquency rates before the COVID-19 crisis. Similarly, during the pandemic, while results are heterogeneous across countries and borrower characteristics, we show that mortgage securitisations that meet the new “simplicity, transparency and standardisation” (STS) criteria, have 0.21% lower delinquency rates. Overall, our findings suggest that the new European securitisation regulation has contributed to improving the credit quality of the securitisation market in Europe, eventually increasing its resilience towards the adverse shocks of the COVID-19 pandemic.