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A covered bond is a bond backed by a pool of loans. For example, a covered mortgage bond might be backed by a pool of mortgage loans. The mortgages remain on the issuer’s balance sheet. The issuing bank can generally change the make-up of the loan pool or the terms of the loans to preserve credit quality. Covered bonds thus have a higher risk weighting than mortgage-backed securities because the holder is exposed to both the non-payment of the mortgages and the financial health of the issuer.
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