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The Securities Industry and Financial Markets Association (SIFMA) today expressed its view that U.S. covered bonds are an untapped but proven resource that could be invaluable in meeting the need for long-term and cost-effective funding sourced from diverse parts of the private-sector capital markets. Moreover, that funding could be translated into meaningful credit for households, small businesses, and the public sector. SIFMA also believes that, with the success of a fragile economic recovery hanging in the balance, the time for developing a legislative framework to support the U.S. covered bond market is now.
SIFMA’s views were presented in testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs at a hearing titled “Covered Bonds: Potential Uses and Regulatory Issues”. The testimony was delivered by Scott A. Stengel, a partner in the Washington, D.C., office of Orrick, Herrington & Sutcliffe LLP and a member of the Steering Committee for SIFMA’s U.S. Covered Bond Council.
“Dedicated covered-bond legislation and public supervision, from the perspective of market participants, creates a degree of legal certainty that regulatory initiatives just cannot replicate,” said Mr. Stengel. “This kind of certainty is critical because the nature of covered bonds as a high-grade defensive investment with limited prepayment risk has no room for ambiguity on the rights and remedies available at law, especially in the event of the issuing institution’s insolvency. Investors will not dedicate funds to this market unless the legal regime is unequivocal and the risks can be identified and underwritten.”
Highlighting the unique characteristics of the product, Mr. Stengel noted that covered bonds offer:
- Stable liquidity
- A cost-efficient form of on-balance-sheet financing for financial institutions
- A separate and distinct investor base
- Funding from the private-sector capital markets without any reliance on U.S. taxpayers for support
- 100% “skin in the game,” because, in contrast to securitization, a financial institution issuing covered bonds continues to own the assets in the cover pool that are pledged as security
- A high degree of transparency and uniformity
“The Council has concluded that a well-functioning market for U.S. covered bonds cannot develop without a legislative framework that stays true to the distinctive features of traditional covered bonds. Anything less would preclude issuing institutions – and ultimately consumers, small businesses, and the public sector – from realizing the cost efficiencies that make covered bonds worthwhile,” said Mr. Stengel.
The full testimony is available at http://www.sifma.org/legislative/testimony/pdf/Senate-Banking-Testimony-2010-Cov-Bonds.pdf.
