The Securities Industry and Financial Markets Association is now backing efforts to establish legislative framework for European-style covered bonds in the United States, adding momentum to the effort as it resurfaces in Washington.
SIFMA said it is supporting the United States Covered Bond Act (H.R. 5823), which would establish a legislative framework for the bonds and make them more competitive in the world market.
The legislation is "on the docket" in Washington, a SIFMA spokeswoman told NMN.
Another securities group, the American Securitization Forum, also has backed the effort in the past.
Experts expect the Federal Deposit Insurance Corp.'s concerns to remain the main challenge blocking the legislation's progress, but believe it is an obstacle that can be negotiated.
"We expect the FDIC and the legislatures to work toward final legislation," Lawton Camp, structured finance partner at the firm told NMN.
A key step in making progress on the issue will be to "get the FDIC on board," said Camp. "The key issue will be how the collateral is treated and controlled after a bank insolvency."
There are some possible ways to address this, Mike Karol, senior counsel at Allen & Overy, told NMN. "There are various options on the table for addressing liquidity and control issues in relation to the cover pool," he said.
Covered bonds could prove more attractive than securitizations to some investors in the U.S. market, but Tom Deutsch, executive director at ASF, said he believes that covered bonds will never see as much demand or be as sizeable a market as securitization in this country.
"If an institution would have to consolidate let's say an RMBS transaction onto their books they may prefer to do that as a covered bond transaction," Deutsch said. The two would likely require similar amount of regulatory capital, but with the latter there would be full recourse to the institution.
