Sunday, October 03, 2010

Bi-Partisan Support Growing for Legislation Creating US Covered Bond Market

Whether it happens in the upcoming lame duck session of the 111th Congress or next year in the 112th Congress, there is a growing bi-partisan consensus to pass legislation creating a US covered bonds market. Recently, the House Financial Services Committee reported out by voice vote the US Covered Bond Act, HR 5823. Committee Ranking Member Spencer Bachus has historically supported this type of legislation. In a letter to Senate Banking Committee Chair Chris Dodd, that he co-signed with Rep. Scott Garrett principal author of the covered bond legislation, Rep. Bachus said that  Congress must consider creative means to enable the private sector to provide funding for additional consumer credit and alternative options for financial institutions to finance their operations.  Establishing a U.S. covered bond market would further each of these shared policy goals. The letter also noted that a robust U.S. covered bond market would provide a significant source of much-needed liquidity for home mortgages, commercial real estate (including multi-family), student loans, and public sector financing.

In a statement issued on Dec. 15, 2009, on the occasion of committee hearing on covered bonds, Rep. Bachus said that covered bonds represent a cost-efficient form of on-balance-sheet financing for financial institutions that, in turn, can reduce the cost of credit for families, small businesses, and the public sector. Covered bonds are also a private market solution to the need for market participants to have ‘skin in the game.' The issuers of covered bonds are responsible to their bond holders for the risk posed by the underlying loan pool, emphasized the Ranking Member. For example, if the underlying loans default, bond holders can make claims against the issuer.  And if the issuer becomes insolvent, bondholders have a secured claim to the assets in the loan pool, as well as recourse to other assets of the insolvent firm.  Additionally, issuers of covered bonds are required to account for the risk posed by their bonds on their balance sheets.