United States

The US Federal Deposit Insurance Corporation’s interim final policy statement, published last week, showed its willingness to give covered bonds a privileged status, but, as a consultation document, it raised as many questions as it answered. However, an FDIC spokesperson gave The Cover clarifications on several points.

US banks have broadly welcomed the Federal Deposit Insurance Corporation’s draft policy statement on covered bonds, confident that any limits the regulator has put in place will not prove overly restrictive in the longer term. But while the FDIC’s endorsement is seen as a crucial first step, some observers are already pressing for more.

The Federal Deposit Insurance Corporation’s draft covered bond policy statement proposes that covered bond issuance be limited to 4% of an issuer’s total liabilities, but raises the prospect of allowing greater issuance if higher insurance premiums are paid. It also plans to exempt covered bonds from the full 90 day stay on payments in the event of bankruptcy, but in a way that would not completely remove the possibility of delays.

The Federal Deposit Insurance Corporation today put forward its interim proposals for a policy statement on covered bond issuance in the US, inviting comment on a 4% limit of covered bond issuance to total liabilities and a 10 day repudiation period.

When Don McLean sang “Bye-Bye, Miss American Pie” he was apparently expressing his feelings on the transition from the innocence of childhood to the darker realities of adulthood. Covered bond issuers at the Euromoney US Covered Bond Investor Forum in New York earlier this month faced up to a similar mood of disillusionment.

Ronald Reagan once famously declared: “There are no such things as limits to growth, because there are no limits on the human capacity for intelligence, imagination and wonder.” Covered bond issuers and regulators at the Euromoney US Covered Bond Investor Forum in New York last week may not be as unconstrained in their hyperbole as the former US president and star of hit film Bedtime for Bonzo, but they enthused how covered bonds could grow in the face of regulatory limits and their interaction with retail depositors.

Comments from a Federal Deposit Insurance Corporation official that it would be acting fairly quickly to give regulatory clarity on the status of covered bonds in the US were welcomed by delegates at the Euromoney US Covered Bond Investor Forum in New York last week. However, there was disagreement as to whether attempts to introduce legislation would do harm or good.

US Treasury secretary Hank Paulson came out as the latest convert to covered bonds yesterday (Thursday), saying that they could help address some of the problems in the US mortgage finance industry that have come to light in the subprime crisis.

Representatives of BlackRock, the Tennessee Consolidated Retirements System, and TIAA-CREF delivered their verdicts on covered bonds at the Euromoney US Covered Bond Investor Forum yesterday (Wednesday), and, with apologies to Mr Clinton in this election year, their views could be summed up by the slogan: it’s the liquidity, stupid.

Moody’s Investor Services has downgraded Washington Mutual’s covered bonds from Aaa to Aa1. With concerns over the US housing market hardening, Fitch and Standard & Poor’s (S&P) have cut the rating of the bank itself and its ratings remain on their watch lists with negative implications.

The euro market has been closed to US issuers since the subprime crisis struck and European issuers have stayed at home after their successful transatlantic visits in early 2007. But the turmoil has made the US authorities look again at the merits of covered bonds and the noises coming out of Washington are encouraging.

Some market participants are concerned that the policy statement that the Federal Deposit Insurance Corporation is drafting could be too restrictive on the amount of covered bonds US banks can issue. Meanwhile, the American Securitisation Forum has been lobbying the regulator to put forward the product’s case.