Senate Lawmakers Unveil Covered Bond Bill

WASHINGTON — A bipartisan group of Senate Banking Committee members introduced a bill Wednesday that would help create a covered bond market in the United States.

The legislation, authored by Sens. Kay Hagan, D-N.C., and Bob Corker, R-Tenn., largely mirrors a House bill from Rep. Scott Garrett, R-N.J., that would establish a framework to expand funding options for U.S. financial institutions. The bill is co-sponsored by Sens. Chuck Schumer, D-N.Y., and Mike Crapo, R-Idaho.

"With a legislative framework in place, U.S. financial institutions will have a powerful tool that can be used to fund loans to small business and households," said Hagan. "The bill would level the playing field for U.S. financial institutions and help strengthen our economy."

Sen. Corker added that covered bonds would serve as "another source of private capital in the U.S."

Covered bonds are touted as an alternative to securitization. Unlike securitization, in which loans leave the originator and are packaged into securities sold on the secondary market, the mortgages behind covered bonds stay on a bank's balance sheet. The collateral is refreshed with new loans if the original assets stop performing.

Supporters tout it as a safer system than the current secondary market, which was hit with a wave of losses in the wake of the housing crisis.

"With the housing market still struggling to recover, covered bonds are a common sense solution that can help bring private capital bank into the housing market," said Schumer.

In May, Garrett's bill, which was co-sponsored by Rep. Carolyn Maloney, D-N.Y., was approved by a voice vote in the House Financial Services' capital markets subcommittee.

Garrett lauded the move by Senate lawmakers to find new ways to unlock capital.

"They know we must consider creative ways to enable the private sector to provide additional mortgage, consumer, commercial and other types of credit," Garrett said in a press release.

In Europe, covered bonds have been used for decades to help provide additional funding options and has served as a major source of liquidity for many European country's mortgage markets. The creation of a similar market in the U.S. has faced obstacles in the past.

The FDIC previously fought against a covered bond provision introduced by Garrett during the regulatory reform debate last year. Despite support from Rep. Barney Frank, then chairman of the Financial Services Committee, the measure was stopped by Senate conferees over concerns raised primarily by the FDIC and the Treasury Department.

Community banks also have raised a number of concerns with Garrett's bill when it was first introduced March, arguing that the largest banks would be the primary beneficiaries.