How would you compare the potential investor base for covered bonds to the investors for mortgage-backed securities?
They are two very different investor bases. If somebody buys RMBS [residential mortgage-backed securities], they’re taking convexity risk on the pool — that is, a prepayment risk. You never know when your investment is going to pay back for sure because mortgage loans can be repaid at any time. And you’re taking 100% collateral risk. Whereas with a covered bond you know exactly when it’s going to pay back. And you’re only secondarily taking a collateral risk, because you’re primarily looking to banks — and the collateral pool is updated every month, so if you ever have to rely on the collateral you start with a nice, fresh collateral pool. So a very different type of investor, a very conservative investor — and you could see where diversification of funding between the two investor groups could be an important benefit for issuers. One of the unusual features of the proposed legislation is that it would provide for covered bonds backed by credit card receivables, student loans, auto loa
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