Written by Angelos Delivorias
The covered bond is a debt instrument with a long history in Europe. There has never been a default of a covered bond, and they performed relatively well during the latest financial crisis. They are characterised by the double protection offered to their holders, the separation of collateralised assets in a cover pool that is dynamically managed, and strict regulatory and supervisory frameworks.
The main issuers of covered bonds are banks and the debt they use is mainly mortgage or public-sector debt, although in the context of the current economic environment, many suggest extending them to include SME debt too.
Covered bonds bring numerous benefits to all parties involved, although some researchers have pointed out certain drawbacks which can increase systemic risk and therefore need to be investigated more closely by regulators and supervisors.
There is no single, harmonised, legal framework for covered bonds, and the legislation relating to them at EU level is interwoven in the provisions of different regulations and directives. However, some convergence has taken place following the development of the eligibility criteria for preferential capital requirements under the Capital Requirements Directive (CRD IV). The European Commission, after consulting the European Banking Authority, intends to review the treatment of such bonds in this context. Taking into account the findings of this review, it is then expected to launch a study on the merits of introducing an EU framework for covered bonds in 2015.