What is a Joint Bond
A joint bond, or a joint-and-several bond, is one where two or more parties guarantee interest and principal. In the case of default, the bondholders have the right to claim the assets of all the issuing institutions, corporations, or individuals. This dual responsibility reduces risk and the borrowing costs.
BREAKING DOWN Joint Bond
Joint bonds can include any combination of parties. They are common when a parent company is required to guarantee the obligations of a subsidiary business. A parent company is one that controls another, smaller enterprise by owning a substantial amount of voting stock or control. Parent companies are typically larger firms that exhibit control over one or more small subsidiaries in either the same industry or complementary industries.
When the smaller business wishes to take on a capital project, they may not be able to float a bond without the help of the parent company. In such an instance, debt holders may not be interested in taking on a debt investment in a subsidiary which may not share a credit rating quite as high as its parent. Thus the parent company will act as an additional guarantor on the debt, similar to the way a parent will co-sign on a car note for a child.
Federal Home Loan Joint Bonds
Another example of a long-time joint bond issuer is the Federal Home Loan Bank System (FHLB). The bank, founded by Congress in 1932, was to help finance housing and community lending. The FHL Bank Office of Finance issues a joint bond security to fund the nation’s 11 Federal Home Loan Banks. This financing is then passed on to local financial institutions to support lending to homeowners, farmers, and small businesses.
The Federal Home Loan Bank’s organizational structure of joint-and-several liability makes it unique among housing-related government-sponsored enterprises and helps it serve as a pillar of the nation’s housing and small-business finance system.
Lessons From Greece on the Need for Joint Bonds
Many economists argue that the European Union should consider issuing joint bonds to strengthen the European currency. The threat of Greece’s exit from the eurozone in 2014 illustrates their point. Greece was unable to stimulate its way out of a local recession because it had no local currency to devalue. Advocates of joint bonds argued that for this reason, Greece needed the support and credit of its fellow eurozone members so that it could pay its bills until growth began again.
Proposals for a European joint bond, or a European common bond, are floated intermittently. The latest iteration, called a European Safe Bond, as proposed in 2018 by a committee chaired by the Irish central bank governor Philip Lane.
European banks and many governments would be supportive of such proposals since it would meet the demand for safe government debt. Also, it will dampen the chance of financial panic. Such recommendations, however, are usually blocked by Germany. German representatives are wary that a European joint bond would encourage fiscal irresponsibility in the European periphery.