A prominent Republican is raising concerns about covered bonds and the risks they may pose to the federal deposit insurance fund.
Some proponents want covered bonds to become an alternative to issuing mortgage-backed securities, Rep. John Campbell, R-Calf., said during a recent subcommittee markup of a covered bond bill. But he stressed that covered bonds, “can never be more than a tiny part of the housing market."
The House Financial Services Capital Markets and GSE subcommittee approved the covered bond bill by voice vote, but not before the legislation's sponsor, subcommittee chairman Scott Garrett, R-N.J., agreed to address Campbell's and Democratic concerns before the full committee takes up the measure.
The bill (H.R. 940) would establish the regulatory framework for FDIC-insured banks to issue covered bonds that are collateralized by mortgages and other assets.
In these transactions, the mortgages remain on the bank's balance sheet and investors take on the interest rate risk. However, covered bonds issued by European and Canadian banks are over-collateralized.
Investors also expect banks to replace or substitute any loans that go bad in the covered bond pool with a performing loan. "This substitution could cause problems for the security of that bank and potentially the FDIC," Campbell said at a markup last week.
He wants a limit on substitution and a cap on the percentage of a bank's assets backing covered bonds. The California congressman suggested a limit of 3% or 4% of assets. But Campbell said he needed more input before offering an amendment.
