Legislation Needed to Start U.S. Covered Bond Market

Covered mortgage bonds — which have yet to appear in the U.S. — trade at better prices when there is a solid legal foundation for the securities, according to a German trade group executive. "It is essential that the underlying legal framework be of high quality," said Jens Tolckmitt, executive director, association of German Pfandbrief Banks. He noted German banks were able to issue 10 billion to 14 billion euros in private covered bonds per month during the height of the financial crisis — September 2008 through January 2009. Mr. Tolckmitt made his comments during a panel discussion on creating a covered bond market in the U.S. Congress is toying with the idea of passing covered bond legislation but no firm timetable is in place. Morrison & Foerster senior counsel Jerry Marlatt noted that legislation sponsored by Rep. Scott Garrett, R-N.J., would assure investors that the FDIC would not liquidate covered bond assets in the event of the issuing bank's failure. Without this legislation, investors would demand higher premiums and higher over-collateralization. "Legislation would take a lot of the expense out of issuing U.S. covered bonds," Mr. Marlatt said. Canadian banks began issuing covered bonds in 2007 without legislation, but did not face FDIC-like issues, according to David Power of the Royal Bank of Canada. Nevertheless, Canadian banks are seeking covered bond legislation, Mr. Power said.