The House Financial Services Committee has approved a bill to permit federally insured banks to issue covered bonds that are collateralized by mortgages and other assets.
Committee members passed the covered bond bill (H.R. 940) by 45-7 after accepting an amendment that would give federal regulators the authority to limit the amount of covered bonds banks can issue.
The amendment by Rep. John Campbell, R-Calif., leaves it up to the regulators to set a cap.
The amendment allows for the creation of a covered bond market in the U.S. but ensures covered bonds don't "weaken the banking system" and put the taxpayers or Federal Deposit Insurance Corp. at risk, Rep. Campbell said.
The chief sponsor of the bill, Rep. Scott Garrett, R-N.J., supported the Campbell amendment.
However, an amendment drafted by FDIC and offered by Rep. Barney Frank, D-Mass., was rejected by voice vote.
The FDIC amendment would give the agency more control over the underlying assets of a covered bond if the issuing bank fails.
Rep. Garrett said the FDIC amendment would subject investors to pre-payment risk and undermine the creation of a U.S. covered bond market. "If pre-payment risk exists, that product is no longer considered a covered bond," Rep. Garrett said.
FDIC claims H.R. 940 is subsidizing covered bond investors at the expense of its Deposit Insurance Fund.
"The bill creates a super class of protected creditors that will face no risk with their investment – giving them rights available to no other private secured creditor and freeing them of the market discipline we are trying to restore,"" FDIC spokesman David Barr said.
