Covered Bonds (CRS Report for Congress)
| Release Date |
Revised Dec. 3, 2009 |
| Report Number |
RS22925 |
| Report Type |
Report |
| Authors |
Edward V. Murphy, Specialist in Financial Economics |
| Source Agency |
Congressional Research Service |
| Older Revisions |
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Summary:
Covered bonds are a relatively common method of funding mortgages in Europe, but uncommon in the United States. A covered bond is a recourse debt obligation that is secured by a pool of assets, in this case mortgages. The holders of the bond are given additional protection in the event of the bankruptcy or insolvency of the issuing lender. Covered bonds have some features, such as pooled mortgages, that resemble securitization, but the original lenders maintain a continuing interest in the performance of the loans. Because some believe that the subprime mortgage turmoil may have been influenced by poor incentives for lenders using the securitization process, some policymakers have recommended covered bonds as an alternative for U.S. mortgage markets. Since issuing banks do not sell mortgage assets to securitization trusts, accounting features of covered bonds may provide more readily accessible information to potential purchasers of the covered bonds and to the shareholders of the banks issuing the covered bonds. The last Bush Administration Treasury Secretary, Henry Paulson, stated in public remarks on March 13, 2008 that covered bonds could bring more certainty and more competition to mortgage markets, and the Treasury Department subsequently released a best practices guide for covered bonds on July 28, 2008. However, some features of American banking regulations may have to be clarified to facilitate the use of this finance instrument. For example, the Federal Deposit Insurance Corporation (FDIC) issued two new policy statements in 2008, Financial Institution Letter (FIL) 34-2008 and FIL 732008, clarifying its obligations to the holders of covered bonds if an FDIC-insured institution is placed in FDIC receivership or conservatorship. The Equal Treatment for Covered Bonds Act of 2009, H.R. 2896, introduced by Congressman Garrett on June 16, 2009, would define a covered bond as a nondeposit recourse debt with a term to maturity of at least one year and secured by specifically identified assets. H.R. 2896 also calls for rulemaking regarding covered bonds to be conducted jointly by financial regulators. On November 18, 2009, Congressman Garrett proposed an amendment related to covered bonds during markup of the Financial Stability Improvement Act of 2009, H.R. 3996, but subsequently withdrew the amendment. This report will be updated as conditions warrant.
