The push for covered bond legislation – left on the cutting room floor when Fin Reg. was finalized during a marathon session last week (or should I say finalized subject to Senator Scott Brown’s continuing review) – is coming under renewed discussion by Congress (led by Representative Scott Garret) and the FDIC.
The FDIC balked at the proposal that was to be included in the Dodd-Frank bill because of concerns about the effect of certain collateralization requirements on failed banks’ balance-sheets. Covered bond terms can require issuers to replace weakening collateral upon the occurrence of certain triggers; in a receivership scenario, this re-collateralization requirement would force the FDIC to re-deploy quality assets to serve as bond collateral and shift the risk of loss of declining collateral from bondholders to the government. The FDIC hates when that happens.
The FDIC is also pressing for the ability to immediately take control of collateral assets to the extent of any over-collateralization, and to extend the period of time allowed for the FDIC to find a purchaser for the failed-issuer’s covered-bond program. Nonetheless, the FDIC appears very open to getting some sort of deal done. Industry groups – including the American Securitization Forum and the Securities Industry and Financial Markets Association – are watching these developments closely and appear encouraged by the ongoing discussions.
For my part, the desire by the industry and regulators alike for a robust domestic covered bond market has reached a critical mass, and we can expect legislation (in some form) to arrive before fourth quarter.