The House Financial Services Committee agreed late Wednesday to make changes to a bill to establish a covered bond market in order to address some of the concerns raised by the Federal Deposit Insurance Corp. (FDIC).
The bill was adopted by the committee on voice vote.
The FDIC has said it supports a covered bond market but fears it could make failures more expensive if not done properly. Ahead of a vote by the banking panel, it was seeking changes that would give it a greater say in regulation of covered bonds and additional tools to handle the insolvency of an issuer.
An amendment from Rep. Melissa Bean, D-Ill, was adopted by voice vote that would take regulation of covered bonds from the Office of the Comptroller of the Currency (OCC) and give it to a consortium of federal regulators, including the FDIC.
In an interview, House Financial Services Committee Chairman Barney Frank said the changes were designed to appease the agency.
"Their concern was they are afraid that the bank would assign a disproportionate share of the good assets to cover the bond and they wouldn't have enough left," Frank said. "There's an amendment to make them the regulator so they can issue rules to prevent that."
Unlike securitization, in which a bank sells off its loans to be packaged into securities, covered bonds are issued by the bank to fund assets that remain on the balance sheet, and they require collateral to be refreshed with new loans if the original assets stop performing.
Under the Bean amendment, the OCC, FDIC, Federal Reserve Board and the Securities and Exchange Commission would have to promulgate joint rules dealing with covering bonds. The primary regulator would enforce the rules for the institution it oversaw.
Regulators would need to "confirm" to the FDIC that covered bond issuances by depository institutions would not incur any "material loss" to the DIF and the FDIC would have a consultation role in approving the issuance.
If regulators failed to act, the powers would be transferred to the Treasury Department, which would have 180 days to issue rules.
The provision would effectively delay any issuance of covered bonds for as much as a year after enactment, which critics argue would impede using them as a tool to restart the housing markets.
The compromise was not expected to entirely satisfy the concerns of either the FDIC or the bankers eager to begin covered bond issuances.
But Rep. Scott Garrett, R-N.J., the bill's author, and Bean said they would continue to work on the issue. Frank added that there is another issue that FDIC Chairman Sheila Bair has raised concerning over collateralization on the bonds, which he promised to address before the bill goes to the floor.
"We agree to address that as we go forward," he said. "The concern is a potential drain on the Deposit Insurance Fund. … This one last issue remains and it seems like something that could be worked out… before that bill moves on to the floor in September."
Garrett said in an interview ahead of the debate that he was disappointed about giving the FDIC greater control, especially since the House conferees agreed to support his provision during the regulatory reform conference.
Garrett and other critics of the FDIC's requests argue that if the agency can repudiate covered bonds, they will cease to be a secured asset and fail to function as intended.
"That's still a work in progress," he said. "I'm concerned that they are not favorably-inclined towards the covered bond mechanism and want to have veto power."
