Regulatory Outreach for Student Education

Engaging Students in the Debate Over Financial Services Reform

Today’s debate over regulatory reform is a watershed activity in the careers of financial industry professionals. Years ago, similar debates over mandated pre-funding of pension liabilities (ERISA) and the reunification of investment banking with commercial banking (Glass Steagall's repeal) changed the direction of financial market evolution. Opinions may differ on the merits of those changes, but no one disputes their significance.

Without question, college students and young professionals should be well-versed in the issues involved in today's debate. The Regulatory Outreach for Student Education (ROSE) program is the Center's way to give top students, tomorrow's business and finance leaders, opportunities to experience the financial regulatory process up-close.  The ROSE program is designed to put students in touch with the regulators, policy-makers, and industry leaders who are currently shaping the financial regulatory landscape.  We then challenge them to research and articulate their own positions on the most intriguing and interesting issues.  

ROSE Program Blog

Friday, November 11, 2011

Congress Introduces Bill Expanding Funding Options for US Financial Institutions


Author: David Schwartz J.D. CPA David Schwartz J.D. CPA

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.
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