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Capital Markets

Is US covered bond legislation finally in sight?

Geithner supports move; Foreign issuance into dollar market increases

Is a covered bond market finally going to develop in the US? According to Ben Colice, head of covered bond origination at RBC Capital Markets in New York, legislative proposals for a US covered bond market "could be marked up in early May". He adds: "The rules would take some time to put together, but it feels like this is the closest we have ever been to getting legislation for a US covered bond market in place."

In March, Treasury secretary Timothy Geithner said he supported such legislation and both Republicans and Democrats have said they are introducing a bill in the Senate.

Although US banks can issue covered bonds (and in 2006 and 2007 Washington Mutual and Bank of America did so), there has been little interest from either issuers or investors. According to Barclays Capital, the US banks account for less than 1% of the €2.4 trillion covered bond market. Covered bonds are backed by pools of mortgages or loans that are kept on a bank’s balance sheet, giving investors access to the assets should the financial institution go bankrupt.

The laws surrounding investor protection in the US have been vague. "In Europe, laws are very clear about what would happen to the investments were a bank to become insolvent," says Greg Reiter, head of MBS strategy at RBS in Stamford, Connecticut.

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