Covered bonds are “dual recourse” bonds issued
by (or offering recourse to) a credit institution
and with priority recourse to a cover pool of
collateral. Investors in effect have a claim against
the issuing institution in the fi rst instance, and,
in the event of failure of the issuer, a priority
claim on the cover pool. Compared with other
debt securities issued by fi nancial institutions,
such as senior unsecured debt or asset-backed
securities, covered bonds can be seen as “senior
secured debt” (see Chart 1). This dual-recourse
nature should make covered bonds resilient to
shocks to either issuer or collateral.
There are many different types of covered
bond in the EU market and no universally
agreed defi nition exists. The closest to a
shared defi nition is the “essential features of
covered bonds” agreed by the industry body,
the European Covered Bond Council (ECBC;
see Box 1).