250 years of history of covered bonds

On 29 Aug 1769, Frederick II led discussions on the introduction of a new financial instrument, which was later sealed by a cabinet order signed in Wrocław (Breslau) which in in Poland today. The year 2019 marks 250 years of covered bonds.

EBRD reviews this fascinating history of covered bonds:

Financial innovation is as old as the financial sector itself. But sometimes we can move forward by dusting off instruments that have been in our tool box for a long time, adapting them to modern usage and applying them, in order to address contemporary challenges. Such is the case with covered bonds.

First introduced by Frederick II of Prussia exactly 250 years ago, covered bonds have now become a major building block in efforts to build safe and efficient capital markets in many central and eastern European countries.

And perhaps it is not accidental that the forerunner of the modern covered bond framework was initiated in Breslau. Today, the city is called Wrocław and belongs to Poland – one of the countries where the EBRD has played a major role in developing the capital market as the “engine room of a modern economy”.

While the economies in this region have been growing strongly over the past 30 years, the development of capital markets was not able to fully keep up with this pace. Whereas the central and eastern European countries currently account for 8 per cent of the EU’s total GDP, their capital markets represent only 3 per cent of all listed shares and debt.

Yet, capital markets are essential for the functioning of a modern economy. In the case of central and eastern Europe, we still see an overdependence on bank finance, with associated problems such as access to finance and a persistent gap between demand and supply.

It demonstrates that capital market development is one of the key pressing challenges for these countries to secure their advances and lay the groundwork for further progress. It is here that covered bonds, as a long-term funding tool, come in.

Covered bonds are debt securities issued by banks and backed by a portfolio of mortgages. They are not a panacea, but they are an important and efficient source of long-term, low-risk funding. They can benefit issuers, investors, market participants and the public by stimulating the real economy with their vitalising impact on the housing market.

There is a book which looks at usage of covered bonds across the world economies.

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