On November 9, 2011, Senators Kay R. Hagan (D-NC) and Bob Corker (R-TN) introduced a bill that would provide a legislative framework for establishing a US covered bond market. The purpose behind creating a covered bond market in the US is to enhance liquidity and provide a new source of stable, long-term financing to financial institutions and others derived from private capital markets.
According to Senator Hagan, this legislation would provide an important source of funding for the capital markets sorely missing in the United States.
The US lags behind its global peers in the development of a covered bond market because we lack a legislative framework for issuers and investors. With a legislative framework in place, US financial institutions will have a powerful tool that can be used to fund loans to small businesses and households. This bill would level the playing field for US financial institutions and help strengthen our US economy.
The United States Covered Bond Act (S
1835) would create a legislative framework for banks to issue securities backed by pools of loans, or "covered bonds." These securities would be registered with the SEC under the Securities Act of 1933 and the Investment Company Act of 1940, and could provide a ready flow of liquidity from the capital markets to individuals and small businesses. The bill also outlines oversight by the SEC and banking regulators who may identify eligible asset classes for cover pools, set minimum overcollateralization requirements, and create a registry of covered bond programs to enhance the programs' transparency to counterparties and investors.
Creation of a covered bond market in the US is expected to enhance the stability of the broader financial system.
According to Senator Corker:
By creating a legislative framework for the development of a covered bond market in the U.S., we have the opportunity to diversify and strengthen liquidity to finance mortgages and consumer credit.
Covered bond markets have shown relative success as source of financing in Europe and Canada when other more traditional channels of credit were disrupted or subject to stress.
Covered bonds provide US financial institutions an important new tool for achieving stable, long-term financing from private capital markets. Financial institutions in 30 countries—including Germany, the UK, and Canada—already issue covered bonds. At the end of 2009, the total outstanding volume of covered bonds reached €2.4 trillion and this year foreign banks have issued $32 billion of covered bond to U.S. dollar investors. The funding that covered bonds provide would allow US financial institutions to provide stable long-term credit to consumers, small businesses, and governments.
Covered bonds would provide the US capital markets with a privately sourced avenue for liquidity with the added benefit that bond sponsors would retain some "skin in the game," thereby adding some assurances as to their relative market risk. In addition, the legislation contains a unique set of provisions for unwinding these securities in the event of an issuer’s default on its covered bond obligations, and also lays out a procedure for dealing with the covered bond program should an issuer be placed in receivership.