06/24/2011

FDIC Official Dampens Covered-Bond Push

 

Martin Gruenberg, widely viewed as President Obama’s top choice to lead the FDIC, has taken a stand on pending covered-bond legislation that is antithetical to the industry players’ positions.

In an informal meeting with supporters of the bill, Gruenberg said last week he supports the FDIC’s long-standing position that in the event of a bank failure, the agency — and not investors — should have first dibs on any excess collateral tied to a covered-bond offering. Gruenberg, currently vice chairman of the FDIC, is expected to get Obama’s nod to replace outgoing chairman Sheila Bair, who steps down July 8.

Gruenberg’s comments on the legislation came as something of a shock to lawmakers and bank lobbyists, who quietly had been assured by administration officials that Bair’s replacement would be more receptive to their concerns. Market players have said that for a covered-bond market to emerge in the U.S., the assets in “cover pools” would have to be protected from seizure by regulators.

As one industry insider put it, Gruenberg’s position “has presented some issues that have to be taken care of, or there will be no covered-bond market in the U.S.”

The bill, dubbed the U.S. Covered Bond Act, advanced in the House on June 22, when the Financial Services Committee voted 44-7 to send it for a full floor vote. The legislation is widely expected to pass the Republican-controlled House, but faces more opposition in the Democrat-controlled Senate, where Sen. Charles Schumer (D-N.Y.) is expected to introduce a companion measure later this year. The FDIC has been lobbying Senate Democrats to insert language granting the deposit insurer control of cover-pool assets in the event of a bank failure.

Rep. Barney Frank (D-Mass.) tried this week to introduce similar language in the House version, but his efforts were rejected by the financial services committee. Rep. John Campbell (R-Calif.) succeeded in introducing language limiting a bank’s outstanding covered bonds to 4% of its overall assets.

The House bill, introduced March 8 by Reps. Scott Garrett (R-N.J.) and Carolyn Maloney (D-N.Y.), would create the legal framework for a covered-bond market in the U.S. Such a market has existed in Europe for centuries. This year, U.S. investors are expected to buy more than $60 billion of covered bonds issued by banks in Canada and Europe.

While European covered bonds are mostly backed by residential mortgages, the pending U.S. legislation would expand the list of cover-pool assets to include auto loans, student loans, credit-card accounts and perhaps some other receivables.

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