Looking to Europe: The US needs covered bond rules. Following Europe’s lead would make them cheaper to sell and remove the need for an issuing series trust


Covered bonds are relatively unique: an investor has recourse to the issuing bank, but if the bank is insolvent payments continue to be made on the bond through maturity from the collateral pool securing the bond. In 2006 and 2007 two US banks, Washington Mutual and Bank of America became the first US banks to enter the market. But in the absence of an enabling covered bonds statute in the US, a quasisecuritisation structure was used, which proved to be increasingly expensive for issuers. As a result, there is now an active effort underway to adopt federal legislation to enable covered bonds.

Such legislation would have several benefits for US banks as issuers of covered bonds: (1) it would remove a good deal of unnecessary expense to the issuer of issuing covered bonds; (2) it would improve the secondary market for covered bonds of US issuers; (3) it would level the playing field for US banks relative to their European counterparts; and (4) it would improve the pricing of US covered bonds.

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