Covered bonds are a cheap form of funding that are low risk because they are backed by underlying assets. Regulation heavily supports covered bonds in order to protect investors from any downside risk or asset encumbrance. Banks can even enhance the safety of covered bonds by providing more collateral to back the bond than the size of the bond itself.
Key learning objectives:
Describe the cost effectiveness, risk profile and returns of covered bonds
Describe the regulations and methods of investor protection
What is the downside of asset backed securities and credit enhancements?