What is a covered bond?

In the UK Covered bonds are debt securities with a range of common characteristics:

  • They are issued by a bank or building society.
  • They are collateralised against a segregated pool of assets that, in case of failure of the issuer, can cover claims at any point of time. At the present time all of the UK cover pools are solely made up of UK residential mortgages.
  • They are subject to specific legislation to protect bond holders. In the UK these regulations are the responsibility of the Financial Conduct Authority.
  • They provide ‘Dual Recourse’ claims for an investor as both a direct obligation of the issuer and, under certain circumstances. the investor also has recourse against the collateral held in the cover pool.
  • The value of the assets held in the segregated cover pool is regularly assessed versus the value of bonds issued, including valuations under stress scenarios, to ensure that there is sufficient collateral to meet claims on a timely basis.
  • Typically, covered bond assets remain on the issuer’s consolidated balance sheet (usually with an appropriate capital charge).