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Covered bonds 2

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Regulated covered bond programmes are used by banks and building societies to borrow money in wholesale markets. These programmes are "regulated" because they must comply with the FSA's RCB Sourcebook.

When an issuer borrows in the RCB market the bond is the direct obligation of the issuer. However should the issuer default there is a pool of assets that guarantees repayment to the investor. These assets are ring fenced on the issuer's balance sheet and normally comprise residential mortgages. For this reason the debt is considered less risky for investors, it often attracts a rating of AAA which also reduces the funding cost for borrowers.

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