The confusion began when in the spring of 2003, HBOS, Northern Rock and Bradford & Bingley issued what were heralded as the nation’s first covered bonds. Yet because they were issued under UK bankruptcy law and not under a special European Union directive pertaining to covered bonds, they cannot be legally treated as covered bonds. Since the UK is a Union member, EU law supercedes that of the UK.
The three banks were not perturbed by the discrepancy, noting that the UK law afforded their bonds’ investors even more protection than the EU directive. However, the situation has offended the sensibilities of German mortgage banks, whose covered bonds, called Pfandbriefe, account for two-thirds of the €1500bn market for the asset class.
