As of yet, still, a U.S. covered bond market eludes us. Potentially a new source of funds for lending activity, a covered bond market in the U.S. would compliment the securitization market and the GSE market, enabling institutions to broaden their investor base with the dual recourse nature of covered bonds — recourse to a pool of assets that secures or “covers” the bond if the originator (usually a financial institution) becomes insolvent or otherwise fails to make payments on the covered bonds.
Without legislation to give investors certainty on how the FDIC would treat covered bonds in the event of an issuer’s insolvency, there is little hope of seeing any covered bond deals issued in the United States. Congressman Scott Garrett (R-NJ) is the author of the covered bond bill in the House but a similar bill has yet to be introduced in the Senate. On September 15, 2010, the U.S. Senate Banking, Housing and Urban Affairs Committee held a hearing on covered bonds. Congress may have a “lame duck” session after the election to take up urgent matters but it’s not likely that covered bonds will be deemed an urgent matter. If the bill is not voted on before final recess this session, the bill would need to be introduced anew in the next session of Congress in January.
There is no question that investor demand for covered bonds is there. The panelists at the SIFMA Spotlight Series on Covered Bonds earlier this week discussed the prevalence of “Yankee issuances” — issuances of covered bonds into the U.S. by issuers located in foreign countries such as Canada, France, Germany and the UK. Some serious U.S. investor cash reportedly to the tune of $20 billion has funded these issuances in 2010.
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