On July 30, Rep. Scott Garrett (R-New Jersey) introduced the Equal Treatment for Covered Bonds Act. According to Garrett, the legislation is designed to help facilitate a robust covered bonds market in the United States and to add liquidity and certainty to the nation's housing market. Rep. Garrett supports Treasury Secretary Henry Paulson and the Federal Deposit Insurance Corporation (FDIC) on their proposals for covered bond regulation, but believes the proposed Equal Treatment for Covered Bonds Act would go further.
According to Garrett, covered bonds as debt instruments are broad enough in scope and magnitude to warrant being authorized and codified as federal legislation. He argues that establishing a statute will lend the added benefit of legislative review, rather than leaving policy open to changes made by a simple motion of the FDIC board. Statutory language, Garrett said, would provide more certainty than a regulatory change, and such certainty could promote lower transaction costs.
In addition, Garrett suggests that with definitive legal certainty, spreads would be narrower, which would encourage more institutions to enter the covered bonds marketplace. So far, the country's four largest banks have all pledged their support of Paulson's covered bond proposal, but they have yet to put forth any specific plans for bond issuance.
Garrett's legislation amends the Federal Deposit Act by providing covered bonds with the same treatment that is given to other qualified financial contracts. The Act sets the minimum term of maturity for a covered bond at one year but does not set a maximum maturity term. It also adds a clause ensuring that a bank failure will not impair the value of the covered bonds, and it gives joint rulemaking authority for any new covered bond regulations to the Treasury Secretary, Federal Reserve, Office of the Comptroller of the Currency, Office of Thrift Supervision, and FDIC.