Europeans issued the first covered bonds in 1767.
Feb. 08 (16:27)
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Covered Bond Basics
- Ten Things You Should Know About Covered Bonds
- Mapping the Future of U.S. Covered Bonds
- Q&A on Proposed U.S. Covered Bonds Amendment
- 'Looking Forward to a Covered Bond Market'
- Frequently Asked Questions
- FDIC Policy Statement on Covered Bonds--in Plain English
- Treasury's 'Best Practices for Residential Covered Bonds'
- 'ECBC Covered Bond Fact Book 2009'
The Panel: Jerry Marlatt, Jens Tolckmitt, Tim Skeet, Mercy Jimenez, David Power
WASHINGTON, D.C. — At "Why the U.S. Needs Covered Bonds," the focus was not on presentations from the panelists but on questions from the audience. The nature of those questions cast some light on the concerns of U.S. organizations interested in this funding tool. READ MORE>>
(Photo credit: Jason Rosenthal)
The first U.S. covered bonds were issued by Washington Mutual (2006) and Bank of America (2007). They were marketed in Europe.
The U.S. Treasury 'Best Practices' guidelines for covered bonds--released in July 2008--are less restrictive than the requirements of the FDIC's policy statement issued that same month.
Although covered bonds have existed in Europe for centuries, the market was relatively stagnant until 1995. In that year a German bank transformed the market by offering a "two-way bid-offer spread."
Rating agencies typically analyze the cover pool for U.S. covered bonds on a quarterly basis.
The FDIC's covered bond policy allows bond maturities up to 30 years.
Dedicated covered bond legislation has not been enacted in the U.S., although H.R. 6659 was introduced in 2008.
Bloomberg and Tradeweb have both pledged to create an online marketplace in the U.S. for covered bonds.
The U.S. Treasury’s "Best Practices" guidance sanctions two types of covered bond structure—both "SPV" (Special Purpose Vehicle) and "direct issuance."
In their pioneering U.S. issues, both Washington Mutual and Bank of America issued covered bonds whose structure included an “SPV” (special purpose vehicle) .
The cover pool set up by Bank of America in 2007 is allowed to include both first lien and second lien residential mortgage loans or home equity lines of credit or a combination thereof.
Bank of New York is the appointed independent asset monitor that assesses accuracy of the Asset Coverage Test for Bank of America’s 2007 issue of covered bonds.
Deutsche Bank Trust Company Americas is the appointed independent asset monitor that assesses accuracy of the Asset coverage Test for Washington Mutual’s 2006 issue of covered bonds. (That covered bond program is now sponsored by J.P. Morgan.)
With a “bullet bond,” payments are interest-only until the expected maturity date, when the principal is repaid. A “hard bullet” bond includes a guarantee of principal repayment. A “soft bullet” bond does not—but offers higher yields.
As of mid 2009, covered bonds outstanding in the euro zone amounted to about €810 billion (more than USD $1 trillion). About €600 billion of that amount ($805.5 billion) was estimated to be "liquid," or publicly traded. [Source: Thomson Reuters]
At the end of 2007, there were about €1.5 trillion in covered bonds (more than USD $2 trillion) outstanding in the euro region. About €900 billion ($1.2 trillion) of those were German. [Source: BNP Paribus SA, cited by Bloomberg]
Spanish covered bonds with a ten-year maturity typically trade at about 200 basis points over mid-swaps, while German covered bonds with the same maturity might trade for 60 basis points over mid-swaps. [Source: Unicredit, cited by Reuters (May 8, 2009)]
Before the credit crisis hit in 2008, monthly issuance of covered bonds averaged about €25 billion (USD $34.1 billion). (Source: Financial Times, citing Dealogic)
"Legislative" covered bonds are defined as those that are "primarily governed by a specific legislative framework for covered bonds" in the country of issuance. "Contractual" covered bonds are defined as those that are "governed primarily by contracts." However, contractual mechanisms can be found in legislative as well as contractual covered bonds.
Source: Fitch Ratings, "Contractual Mechanisms in Covered Bonds: Under the Spotlight" (June 4, 2009)
Definition of "Committed Overcollateralization." Moody's Investors Service defines committed overcollateralization as the amount of overcollateralization that the program sponsor is "legally bound to maintain" and "cannot be withdrawn in the future under stressful circumstances."
Source: "Moody's downgrades Bank of America's covered bond ratings to Aa1, on review with direction uncertain" (July 10, 2009)