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Portfolio > Mutual Funds > Bond Funds

Senate to Explore Expansion of Covered Bonds in U.S.

By Melanie Waddell

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Christopher Dodd (D-Connecticut), Senate Banking, Housing and Urban Affairs Committee Chairman, plans to hold a hearing on Wednesday, September 15, to explore the possible expansion of covered bonds in the United States, as well as potential regulatory concerns about covered bonds.

Covered bonds, which have experienced widespread use in Europe, are securities created from either mortgage loans or public sector loans. Sean Davy, a managing director at the Securities Industry and Financial Markets Association (SIFMA), who leads SIFMA’s Covered Bond Council, says covered bonds represent a “significant, if not primary, source of funding for mortgages” in Europe. The Bush Administration attempted back in June 2008 to start a covered bond market in the United States, but that attempt failed.

Dodd’s hearing on September 15 will be Congress’s next stab at exploring the idea of starting a covered bond market in the U.S. Davy with SIFMA says covered bonds are not a “solution” to the crisis surrounding the Government Sponsored Enterprises (GSEs)– Fannie Mae and Freddie Mac–and will not replace securitization. But covered bonds, he says, are “yet another tool to help fund consumer and corporate loans, and, most importantly, [covered bonds] would be an additional stable source of funding for our banking system. That, in turn, translates into better banks.” More stable and healthy banks, he continues, creates a situation where banks are better “able to supply credit to the consumer, and in this environment that’s certainly a focal point.”

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