From a financial stability perspective covered bonds are attractive because they don’t suffer from the downsides of another class of securities used to refinance mortgages, i.e. asset-backed securities (ABS). In the case of ABS, the underlying assets are typically removed from the balance sheet of the originating bank and credit risk is transferred to the holders of the ABS.
However, as identified by international stakeholders like BIS and the World Bank, correspondent banking relationships are weakening due to various factors, such as higher costs and increased KYC requirements, especially for firms operating in risky jurisdictions. As a result, smaller banks in weak jurisdictions have suffered the most.