naked capitalism

doc holiday says:

Just for fun, some covered bond crap:

EUROPEAN COVERED BOND FACT BOOK
http://ihfp.wharton.upenn.edu/2007Readings/I-European%20Covered%20Bond%20Factbook.pdf

Investors should beware that, in the absence of a clearly communicated overcollateralization strategy,
covered bond ratings on a particular issuer could demonstrate a lower long-term rating stability
compared with typical securitizations where possible pool migrations are clearly defi ned in advance.
This is because the overcollateralization necessary to achieve a given target rating is typically over
and above the minimum regulatory overcollateralization requirements. A bank’s clearly communicated
strategy with regard to expected credit risks, the diversifi cation of the cover pool, tolerance levels for
interest rates, currency rate risks, and liquidity risks, as well as the willingness to provide a cushion
over and above the minimum regulatory requirements, can on the other hand mitigate such risk. A
commitment to the Covered Bond compliance test is regarded as an adequate practical application of
the above.

dh says:

Ok, another:

Covering Covered Bonds

http://alephblog.com/2008/07/29/covering-covered-bonds/

If the insurance company’s General Account is insolvent, the separate account policyholders are secured by the assets of the separate account. The separate account is tested quarterly for sufficiency of assets over liabilities. If there isn’t enough of a positive margin, more securities must be added. If those assets prove insufficient in an insolvency, they stand in line for the difference with the general account claimants.
That last example, obscure as it is, is the closest to the way a covered bond functions under the current Treasury Department’s statement on best practices for covered bonds.

Here is what collateral is eligible for the as the pool of assets securing the bonds (stuff from the Treasury document in italics):

Covered Bonds may account for no more than four percent of an issuers’ liabilities after issuance.

Issuers must enter into a deposit agreement, e.g., guaranteed investment contract, or other arrangement whereby the proceeds of Cover Pool assets are invested (any such arrangement, a “Specified Investment”) at the time of issuance with or by one or more financially sound counterparties. Following a payment default by the issuer or repudiation by the FDIC as conservator or receiver, the Specified Investment should pay ongoing scheduled interest and principal payments so long as the Specified Investment provider receives proceeds of the Cover Pool assets at least equal to the par value of the Covered Bonds. The purpose of the Specified Investment is to prevent an
acceleration of the Covered Bond due to the insolvency of the issuer.