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Royal Bank of Scotland considering covered bonds

Royal Bank of Scotland, which is 84% owned by the UK taxpayer, has apparently been sounding out the UK debt market about a potential issue of covered bonds. These are effectively debt instruments which are covered by income from a specific asset which is ring fenced in the event that the bank was to collapse, thereby protecting the assets which are "covering" the bonds in question. These instruments have been very popular in the past although recent turmoil in the European debt market has effectively killed interest overnight.

While there are no definitive plans for Royal Bank of Scotland to issue any covered bonds in the short-term, due to the additional cost associated with problems in European debt market, it is likely to be something which the bank will consider in calmer markets. This is not the first time a major UK banking institution has considered raising additional capital from the debt markets with Lloyds Bank, Barclays and HSBC all increasing their liquidity this year. However, it seems at the moment that Royal Bank of Scotland may leave this particular issue on the back burner.

Once the debt markets recover there will be a flurry of interest from banking institutions looking to recapitalise their balance sheets and increase their liquidity for the longer-term.

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