Garrett Introduces Covered Bonds Amendment
Washington,
Nov 18, 2009 -
Rep. Scott Garrett (R-NJ) offered a covered bonds amendment during the Financial Services Committee markup of the Financial Stability Improvement Act of 2009. This amendment similarly mirrors the legislation Garrett and Rep. Paul E. Kanjorski (D-PA-11) introduced earlier this year, the Equal Treatment for Covered Bonds Act, which aims to help facilitate a robust covered bonds market in the US to add liquidity and certainty to our nation's housing market.
For more information:
CRS Report on Covered Bonds
Treasury Best Practices for Residential Covered Bonds
Federal Deposit Insurance Corporation (FDIC) Covered Bond Policy Statement here
Garrett’s prepared remarks for the introduction of his amendment are included below:
“Thank you Mr. Chairman. And I want to thank my good friend from Pennsylvania, the Chairman of the subcommittee, Mr. Kanjorski, for all of his and his staff’s hard work on this important issue as well as the Ranking Member, Mr. Bachus.
“I think everyone on this committee believes that the concept of risk-retention is a good thing. I also believe that, because of the current problems with our secondary mortgage market and the lack of liquidity for the securitization process, we must continue to look for new and innovative ways to provide increased funding for our credit markets.
“One of those innovative ways that I believe could provide additional liquidity to our credit markets is by establishing a covered bonds marketplace in the U.S. Covered bonds are debt instruments issued by financial institutions and backed (or covered) by a pool of high quality loans. Covered bonds are kept on the balance sheet of the issuing institution and investors have a dual recourse to both the assets used as collateral as well as the underlying institution.
“Covered bonds have been used in Europe for hundreds of years to help provide additional funding options for the issuing institutions. They are a major source of liquidity for many European nations’ mortgage markets. Covered bonds have performed extremely well during the financial crisis largely because of the high underwriting standards used for the loans in the covered pools.
“In the summer of ‘08, a month before the financial crisis began to set in, there was an attempt by the administration to get this market off the ground. The Treasury Department issued a list of Best Practices which described the most prudent ways for interested issuers to offer covered bonds. Also, the FDIC published a final policy statement that provided guidance to investors as to what access the FDIC would offer to the collateral in case of a bank failure.
“To date, there have only been two issuances of covered bonds in the U.S., by Bank of America and Washington Mutual which is now a part of J.P. Morgan. Over the last several months however, there has been a tremendous increase in demand by investors for these bonds. In one week in September alone, there were 7 new issuances in a variety of different European countries that totaled over $20 billion. One financial analyst went so far as to call it an “unprecedented supply frenzy.” So, at a time when we desperately need more private investment and additional liquidity in our credit markets, I believe we must work to set up a system that will allow covered bonds to flourish and their full promise to be explored.
“This amendment would lay out a detailed statutory framework to help facilitate the broader use of these funding instruments in the U.S. A detailed statutory framework is common in the European countries where these bonds flourish and it is needed in this country to provide investors greater certainty in regards to their exact recourse if the issuing institution fails.
“The legislation spells out the variety of different asset classes which would be eligible to be included in a covered bond. It designates the Secretary of the Treasury as the covered bond regulator because of the Department of Treasury’s unique knowledge and expertise of U.S. debt markets. The amendment also details the procedures that are to be followed in the case that an issuer or covered bond issuance fails or defaults.
“Because Subtitle F of the underlying legislation deals with risk-retention and the securitization process, this bill is an appropriate place to include this language which will help jumpstart this marketplace in the U.S. I don’t believe covered bonds are a cure-all to our credit markets but I do believe they would help alleviate some of the current stress they face.
“I want to thank Chairman Kanjorski and Ranking Member Bachus again for working with me closely on this important legislation and ask all the members to support the amendment.”
