What are Euro-denominated covered bonds?

Euro denominated covered bonds are securities created from either a pool of private or public sector loans. Covered bonds are similar to mortgage and asset-backed securities in many ways.

The primary difference is that the loans backing a covered bond remain on the balance sheet of the issuing bank. The bonds are therefore obligations of the issuing bank, and the issuer retains control over the assets. Traditional mortgage and asset-backed securities are typically off-balance-sheet transactions in which lenders sell loans to special purpose vehicles that issue bonds, thus removing the loans—and the risk associated with those loans—from the lenders’ balance sheets.

Many European governments have introduced covered bonds.

According to PIMCO:

Germany introduced covered bonds, known as Pfandbriefe, in 1770 to finance public works projects. Since then, 24 other countries in Europe have adopted the covered bond structure, each with its own unique laws. In Spain, for example, covered bonds backed by mortgages, known as Cédulas Hipotecarias, were created by a special law in 1981, while in France, covered bonds, known as obligations foncières, can be traced as far back as 1852, with the establishment of the first mortgage bank, Credit Foncier de France. All countries with covered bond laws now allow for bonds backed by mortgages, while only a few allow covered bonds backed by public sector loans: Germany, France, Austria and Spain. In Denmark and Germany, covered bonds may also be secured by ship loans.

Kathy Lien

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