From what I could tell a covered bond it's a 'lump' of other loans put together, and sold to someone. Let's say financial institution A sells it to investor B.
In case of insolvency by A, B has the right to the scheduled interest payments from the underlying assets of the bonds, as well as the principal at the bond’s maturity, and if it's not enough also to other assets from the issuer of the bond.
Why would the fact of the underlying loans of a covered bond staying on the balance sheet of the financial institution during the 'duration' of the bond provide some sort of protection to investor B? Is it because, in this way, it eliminates possibility of the institution to sell its bad loans to other investors?
Any help would be appreciated.