Bankers and securities industry representatives are pushing the Federal Deposit Insurance Corp. (FDIC) to go further in encouraging covered bonds as an alternative to securitization.
Many institutions praise the agency's interim policy statement removing one obstacle to covered bonds, but several banks argue that the policy statement was too narrow in scope, would put U.S. banks at a disadvantage against foreign counterparts, and did not define what bondholders would be paid in the case of a bank failure.
"As currently drafted, the policy statement still leaves U.S. issuers at a significant disadvantage to European issuers," Gregory A. Baer, a deputy general counsel at Bank of America Corp., wrote in a June 23 letter to the agency.
The policy statement has sparked unrelated fears at the Federal Home Loan Banks and their member financial institutions, who saw darker motivations in a question from the FDIC about whether banks with abundant secured liabilities, which in theory include covered bonds and Home Loan bank advances, should face a higher deposit insurance assessment rate.
"The FDIC's charging higher assessments for secured liabilities would pose a harsh penalty" for Home Loan bank members "and provide a strong disincentive for use of advances as a funding source," Michael Jesse, the president and chief executive of the Federal Home Loan Bank of Boston, wrote in a June 4 letter.
The April 23 interim policy statement said the FDIC would grant waivers to a 90-day delay on creditors' taking out assets from a failed bank in certain situations, giving investors access to collateral as early as 10 business days after the FDIC, acting as the receiver, stops bond payments.
The initial 90-day delay proved an obstacle for the use of covered bonds, because investors were averse to the possibility of missed bond payments.
FDIC Chairman Sheila Bair spoke out on the issue again Wednesday, saying during a speech in London that her agency wanted to encourage covered bond use as an alternative to securitization.
Unlike securitization, in which a bank sells off its loans to be packaged into securities, covered bonds are issued by the bank to fund assets that remain on the balance sheet, and they require collateral to be refreshed with new loans if the original assets stop performing.
Covered bonds have yet to take off in the United States. Only two companies B of A and Washington Mutual have issued them here, even though they are a popular funding source in Europe.