History of Covered Bonds

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.

• Justified more favourable treatment of the product, in particular under EU law
• The performance of covered bonds was noticed outside Europe