Originally published in International Financial Law Review in February 2013.

Covered bonds’ dual recourse nature makes them a favoured instrument for investors seeking both safety and yield. If the issuing financial institution fails, investors have preferred access – over all other creditors – to the cash flow and proceeds of the cover pool.

This often means that when market conditions are volatile or difficult, investors are more likely to buy covered bonds than a bank’s unsecured senior debt. Not surprisingly, it follows that issuers tend to rely more heavily on covered bonds over senior debt funding in difficult times. The result is that significantly more of an issuer’s assets become dedicated to covered bond investors.