Covered Bond

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Covered bonds are securities issued by a bank and backed by a dedicated group of loans known as a cover pool. The two different types of covered bonds include those backed by public sector loans and those backed by high-quality mortgage loans.[1] Covered bonds are widely used in Europe, where they are seen as an important tool for banks to fund themselves. Interest is paid to investors from the issuer's cash flow. The credit crisis in the U.S. has fueled interest in the wide use of covered bonds in the U.S. as it's seen as a possible method to unfreeze housing funds. Unlike the complex securities that backed many subprime mortgages, covered bonds are kept in plain view on a bank's financial statements.[2]

On July 28, 2008, U.S. Treasury Secretary Henry Paulson, accompanied by officials from four of the largest banks — Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo — issued a document outlining what Treasury considers best practices for residential covered bonds. The banks said they plan to start issuing the bonds.[3][4]Paulson said officials had been looking for ways to increase the availability and lower the cost of mortgage financing to accelerate the return of normal home buying and refinancing activity.[5] Paulson said he wants to keep the government out of covered bonds in the U.S.

Showing support of the U.S. Treasury's efforts to establish the covered bond market, the Securities Industry and Financial Markets Association (SIFMA) announced that it had formed a U.S. Covered Bonds Traders Committee, which comprises participants in the primary market and secondary market for covered bonds. Member firms that are part of this committee support the growth of the covered bond market in the U.S. and will play an active role in fostering and strengthening this market. SIFMA noted that a liquid U.S. covered bond market can provide an additional and complimentary funding alternative for the residential mortgage market.[6]

Also on July 28, 2008, over-the-counter (OTC), multi-asset online marketplace Tradeweb (which is owned by Thomson Reuters and 10 leading global dealers) announced that it is planning to introduce an online marketplace for covered bonds backed by pools of U.S. residential mortgages. Tradeweb said in a press release that the decision to provide the marketplace was made at the encouragement of the U.S. Treasury, as well as Tradeweb's dealers and institutional clients.[7]


U.S. Department of the Treasury, Secretary Henry M. Paulson, Jr. July 28, 2008 Statement on Covered Bond Best Practices