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US banks pay for covered charge

For most of this decade the majority of US investment banks have scorned covered bonds. Not any longer. So if it's true that they no longer believe it to be an unprofitable backwater of the European capital markets, what factors are at work? Philip Moore discovers.

Bank of America readies a benchmark

THERE ARE NOW no significant debt houses that feel comfortable ignoring covered bonds – an increasingly important product for banks. However, sceptics are asking if they will stick around this time. Many US banks have tried covered bonds before. Around the birth of the jumbo Pfandbrief in 1995 a number of banks ramped up their efforts but soon retreated. And who could blame them? Issuers took full advantage of the increased competition by slashing fees or even asking for a subsidy. And the costs of market-making covered bonds in secondary markets are intense.

It was not just the US firms that ran for the hills. Commerzbank stepped back following the 1998 Russian debt crisis. In fact for years issuers and investors have suffered from various investment banks’ wavering commitment to the product. Even Deutsche Bank dropped down to seventh position in the league tables in 2005 before recovering its poise last year.

But why is there now a sudden rush of US investment banks trying to get into covered bonds? Only Morgan Stanley has persevered over the years and even then lacked much market presence at times.

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