FDIC Okays Covered Bond Policy

The Federal Deposit Insurance Corp. has approved a policy statement that should facilitate the issuance of covered bonds this fall by a few large federally insured banks and thrifts. "Covered bonds can serve as an additional source of financing for mortgage lending, and thereby offer potential benefits for banks and homebuyers," FDIC Chairman Sheila Bair said. The final policy statement assures investors that they will have quick access to the mortgage collateral of covered bonds if an institution fails and goes into an FDIC receivership. However, proponents of covered bonds are disappointed that the FDIC is limiting covered-bond issuance to 4% of total liabilities, which not only restricts issuance but essentially locks midsize banks out of the covered-bond market. The chairman acknowledged that the FDIC wants to see how the market develops before raising the cap. Ms. Bair also served notice that the FDIC may issue guidance later this year that limits a bank's reliance on secured liabilities. Federal Home Loan Bank advances and covered bonds are considered secured liabilities. The failure of the $32 billion-asset IndyMac Bank is going to be very costly for the deposit insurance fund because the thrift had $10 billion in FHLBank advances. The FHLBank has first rights to the mortgage collateral that backs the advances.