History of Covered Bonds
Richard Kemmish
30 years: Capital markets & covered bonds
The covered bond market has a long and illustrious history. In this first video of the series on the covered bond market, Richard describes how the covered bond has performed and how it has developed from its inception to 2008.
The covered bond market has a long and illustrious history. In this first video of the series on the covered bond market, Richard describes how the covered bond has performed and how it has developed from its inception to 2008.
History of Covered Bonds
7 mins 18 secs
Key learning objectives:
Outline the history of covered bond markets
Identify the properties of the modern covered bond market
Describe how the jumbo covered bond birthed liquidity
Explain how the market grew as a result of HBOS and whether it stood the test of the financial crisis
Overview:
The first covered bonds were issued over 250 years ago and are seen today as a safe and risk averse asset – their investments are typically used to fund mortgages and other public sector assets. CBs grew in popularity during the 90’s/00’s via HBOS and survived the 2008 Financial Crisis.
What is the origin of the covered bond?
Covered Bonds were first issued during the reign of Friedrich the Great to help rebuild Prussia after the impact of the Seven Years’ War. It was successful and thus other European countries similarly followed. During its 250-year history, a covered bond has never defaulted.
What are some properties of the modern covered bond market?
- Very safe
- Conservative investor base
- German-dominated investor base
How did formal market-making agreements help the liquidity of covered bonds?
In 1995, the first jumbo covered bond was launched where the underwriting banks formally agreed to make a market for the life of the bond with a fixed maximum bid/ask spread. It was a huge success and very rapidly this liquidity attracted foreign investors. The market-making agreements helped underpin the acceptance of covered bonds as bank liquidity assets.
How did the HBOS covered bond influence growth?
In 2003, HBOS issued the first-ever covered bond without a covered bond law. This was a huge stimulus because:
- It put pressure on a lot of countries to introduce covered bond laws
- Where politicians weren’t persuaded, issuers went ahead regardless using contract law
- Many of the features introduced by HBOS made it into the more traditional covered bond markets
What were the implications of the Financial Crisis on covered bond markets?
Covered bonds survived, flourished even in the darkest days of the crisis.
Implications- Justified more favourable treatment of the product, in particular under EU law
- The performance of covered bonds was noticed outside Europe
Richard Kemmish
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