The Financial Services Committee on Wednesday will consider legislation to establish a framework that allows U.S. financial institutions to issue covered bonds.
Covered bonds, seen by many as a vital alternative to the securitization model, have been used in Europe for centuries to finance mortgages and public sector loans. Covered bonds are a form of debt in which specific assets -- typically loans -- are pooled for the benefit of bondholders. They remain on the balance sheet of the financial institutions that originate them, and as a result, provide greater transparency, liquidity, and align incentives for prudent underwriting.
Financial Services Committee Chairman Spencer Bachus said, "Covered bonds are an innovative source of financing that has worked well in many European countries, particularly in the aftermath of the financial crisis when many other traditional credit channels were badly disrupted. Not only would covered bonds provide much needed liquidity to our economy, but covered bonds are also a private market solution to the need for market participants to have "skin in the game.'"
The bill up for consideration on Wednesday, the U.S. Covered Bond Act (H.R. 940), creates a legislative framework for the development of a covered bond market in the U.S. This framework will enable credit to flow more readily from the capital markets to households, small businesses, and state and local governments in a way that enhances stability of the broader financial system.
"With our economy still recovering from the financial crisis and the need to unlock credit at an all time high, facilitating the development of a covered bond market in the U.S. makes perfect sense. This legislation will not only generate increased liquidity but will also level the playing field so that U.S. financial institutions are no longer at competitive disadvantage to their foreign counterparts," said Capital Markets Subcommittee Chairman Scott Garrett, who is the sponsor of the bill.