About the Covered bond and the establishment of a new law


About the Covered bond and the establishment of a new law

Hello everyone! How is everybody doing in this hot weather? Has any body read some news about the covered bond and its new law? If you haven’t, I will tell you what’s going on! Last October, the Chairman of the FSC, Kim Seok-Dong, said that the FSC will enact a new law for easier issuance of the covered bond. Accordingly, the FSC formed a task force  to legislate the Covered Bond Act.

The background of legislating the Act goes back to June 2011 when the guideline on covered bond issuance was established by the FSC and the FSS. The issuance of covered bonds by banks was introduced as a part of the ‘Comprehensive Measures on Household Debt’. However, the process of securitization incurred excessive costs, and uncertainty remained for investors to claim dual recourse. Consequently, the need for statutory rules for issuing covered bonds has been growing.

What is a covered bond?

Covered bonds are securities composed of public sector loans or mortgage loans. They usually have a relatively high credit rating, because of the quality of the cover pool. Covered bonds are often attractive to investors looking for high-quality instruments offering profitable yields. Covered bonds incur lower costs and provide an efficient way for lenders to expand their business, compared to issuing unsecured debt instruments.

What are the advantages of covered bonds?

The issuer can issue bonds with a higher credit rating than its own.

2. The investors of covered bonds are given a preferential claim for the repayment in case of banks’ bankruptcies.

Expectations and upcoming schedules

-Enabling banks to raise funds at a lower cost

-Stable and effective funding tool for banks even in the event of crises

-Improving household debt structure through the expansion of long-term/fixed-rate loan

This flow chart outlines the upcoming schedule for the Act.

It appears that the enactment of this new law would make the issuance of covered bonds more efficient. And we are looking forward to its positive impacts on solving the household debt problems.

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