Covered Bonds
Covered bonds are debt securities issued by banks and backed by a dedicated pool of high-quality assets that remain on the issuer’s balance sheet.
Meaning in Practice
In practice, covered bonds are secured by assets such as residential mortgages or public-sector loans. Investors have dual recourse to both the issuing bank and the cover pool. These instruments are widely used in Europe as a stable funding source.
Why It Matters
Covered bonds provide banks with reliable long-term funding at relatively low cost. Their strong legal framework enhances investor confidence and financial stability. They play an important role in mortgage and public-sector financing.
Market Impact
High demand for covered bonds reduces bank funding costs and supports lending activity. Market stress can widen spreads and increase refinancing risks. Covered bond performance is closely linked to perceptions of bank solvency and asset quality.
Example
A bank issues covered bonds backed by a pool of residential mortgage loans. Investors receive regular interest payments and benefit from legal protection tied to the asset pool.