What are covered bonds today?
In Switzerland today, covered bonds are an instrument for banks to acquire long-term capital to finance their mortgage lending. That is to say, banks refinance the mortgage loans they issue via covered bonds. Since 1930, Switzerland’s Mortgage Bond Act has provided a strict regulatory framework for issuing covered bonds. Accordingly, only two institutions in Switzerland have the right to issue covered bonds, namely the Central Mortgage Bond Institution of Swiss Cantonal Banks and the Mortgage Bond Bank of Swiss Mortgage Institutions. These mortgage bond institutions loan money to banks, on the condition that the banks use that money solely to grant mortgages to their customers. Covered bonds are issued as fixed-interest securities on which a fixed interest rate is applied for a specified duration. They may be traded on the stock exchange.