As investors avoid asset-backed securitization, banks are using unwanted mortgages as security for covered bonds.

A new legislation,law since March 6, 2008, brings UK covered bonds under the European UCITS (Undertaking for Collective Investment in Transferable Securities) Directive, to widen the investor-base and structuring covered bonds as an attractive instrument for mortgage-laden banks.

Covered bonds use a mortgage portfolio to give investors greater security. Bondholders have recourse to the issuer and to assets in a special purpose vehicle. The SPV manages a portfolio of assets – mortgages, for example – providing security, or cover, for investors if the issuer fails.

In order to become a regulated issuer under the new regime, institutions must provide the Financial Services Authority (FSA) with information about the quality and quantity of the assets in the SPV. The regulator must be notified if the pool changes and the issuer must confirm the state of the assets annually.

For the banks, covered bonds mean paying investors less interest and access to a larger investor base. And investors currently want low risk products, such as covered bonds.

Bair (FDIC) said that the FDIC could perhaps consider setting a limit on the amount of covered bonds a bank could issue as percentage of its total assets, similar to the approach of the Financial Services Authority in the UK, which has also been taken by the Office of the Superintendent of Financial Institutions Canada (OSFI)...

Source: www.coveredbondnews.com


Have quite a long (actually before turmoil) offered securitisation of assets with placement them on balance sheet of SPV, thus covered bonds in full action