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Yes - covered bonds are backed by assets, not deposits. The basic idea is that investors in covered bonds have first recourse to a pool of assets (the mortgages) should the bank not meet its repayments or breach certain covenants. If this happens, the bondholders can use the cashflow (mortgage repayments) to meet the coupons due on the bond or force the sale of the mortgages to recover what's owed. There are various methods, including over-collateralisation, to provide a buffer to bondholders. The key difference between a covered bond and rmbs is that the mortgages typically stay on the balance sheet (rmbs are typically transferred to a spv) and investors in the covered bond have recourse to the rest of the issuer's balance sheet if the covered pool is insufficient to fund losses in event of a default. The advantage for banks is that it can lower their cost of funding, beyond that of even senior secured issues. It also gives them access to completely new, and very large, group of investors to help diversify their funding base. Overall, it's a very good thing for Australian banks and could help people with a mortgage too… A bit of trivia - I believe that no covered bond holder has ever, since the first one was issued in 1769, has ever lost their principal.
Yes - covered bonds are backed by assets, not deposits. The basic idea is that investors in covered bonds have first recourse to a pool of assets (the mortgages) should the bank not meet its repayments or breach certain covenants. If this happens, the bondholders can use the cashflow (mortgage repayments) to meet the coupons due on the bond or force the sale of the mortgages to recover what's owed. There are various methods, including over-collateralisation, to provide a buffer to bondholders. The key difference between a covered bond and rmbs is that the mortgages typically stay on the balance sheet (rmbs are typically transferred to a spv) and investors in the covered bond have recourse to the rest of the issuer's balance sheet if the covered pool is insufficient to fund losses in event of a default.
The advantage for banks is that it can lower their cost of funding, beyond that of even senior secured issues. It also gives them access to completely new, and very large, group of investors to help diversify their funding base.
Overall, it's a very good thing for Australian banks and could help people with a mortgage too… A bit of trivia - I believe that no covered bond holder has ever, since the first one was issued in 1769, has ever lost their principal.
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