I was recently asked about covered bonds. This was timely since the Treasury has just published a review of the UK's regulatory framework for covered bonds. It appears that covered bonds are now seen by regulators as part of the solution to mortgage bank funding problems. In particular comfort is drawn from the fact that investors are more willing to lend to banks provided there is solid collateral. Could this lead to unforeseen problems? 1. Bank senior debt holders are undoubtedly in a more risky position than they used to be. It is most likely that in bankruptcy they will face a bail-in and haircut. Risk averse investors will therefore be attracted to covered bonds despite their lower returns. Q. Will banks and building societies that can't issue covered bonds (mainly because they are too small) be priced out of prime mortgage lending? 2. Covered bonds ring fence assets in bankruptcy. Unsecured creditors including senior debt holders therefore face potentially lower recovery rates. Q. Will this lower recovery rate be fully reflected in any future bail-in? How certain are we that the taxpayer will not end up footing at least some of this bill? 3. In the crisis it was apparent that over reliance on one source of funding, be that wholesale or structured, led to failure. Q. Is it possible that in the future some banks or mutuals become over reliant on covered bond markets? What structural limits does the regulator anticipate for individual firms and collectively? 4. It has been mooted that covered bonds should be eligible in the liquid asset buffer. Q. Is this a good idea? Or does it create the sort of round robin funding problem that existed in the inter bank market? I don’t pretend to know the answers to these questions. But what I do know is that some basic questions weren't asked last time. Could it happen again? You bet it could.