New Horizons in Money and Finance series
Edited by Luisa Anderloni, David T. Llewellyn and Reinhard H. Schmidt
Chapter 8: The Regulatory and Market Developments of Covered Bonds in Europe
Giuseppina Chesini and Monica Tamisari* INTRODUCTION 1 Covered bonds have been one of the fastest-growing sectors of the ﬁxedincome market in Europe over the past decade, continuing to expand with new jurisdictions and borrowers coming on-stream. The rapid growth of the covered bond market has been driven by an accelerating demand for low-risk investment products as an alternative to government bonds. Covered bonds are secured bank obligations oﬀering strong credit ratings, good liquidity and a higher yield compared to government bonds, together with a lower spread volatility. From an issuer’s perspective, they represent a very cost-eﬃcient instrument to raise longterm funding for ﬁnancing low-proﬁt businesses such as mortgage and public sector lending. Originally issued in domestic markets and placed with local investors, covered bonds have become increasingly popular in Europe in the 1990s with the introduction of the new benchmark format designed to attract large institutional investors. The launch of the benchmark format led to the internationalisation of formerly domestic markets. Germany started with large size issues under the name of ‘jumbo’ covered bonds in 1995. France and Spain followed in 1999. Since then, the covered bond market has expanded strongly within Europe. Almost all of the European countries have implemented new covered bond legislation or have updated existing rules to cover this development, while also responding to the considerable growth of mortgage lending in the European Union (EU). In 2003 the ﬁrst ‘structured’ covered bond was issued in the UK with the help of securitisation techniques,...
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