Anticipated FDIC Program Change Could Facilitate Government-Backed Covered Bonds

An FDIC announcement Jan. 16 has the U.S. financial news media talking about covered bonds again.  The reason is found in a press release whose main purpose was to make public a new package of assistance to Bank of America.  One paragraph states:

“Separately, the FDIC board announced that it will soon propose rule changes to its Temporary Liquidity Guarantee Program to extend the maturity of the guarantee from three to up to 10 years where the debt is supported by collateral and the issuance supports new consumer lending.”

Although the announcement does not mention covered bonds, Bloomberg.com quotes an FDIC spokesman as saying that the agency’s change will accommodate covered bonds, which often have maturity periods longer than three years.

MarketWatch observes that “[t]he idea echoes comments Treasury Secretary Henry Paulson made back in July in favor of creating a covered bond market in the U.S., though primarily for mortgage debt.”  The Wall Street Journal calls the move “the latest step by the government to try and build a new market in the United States” that would use the European covered bond model as an alternative to securitization.

If the change is made, the longer-term Temporary Liquidity Guarantee would apply to secured debt issued through the end of June 2010.   (Unsecured debt would not be eligible for the longer guarantee.)  At this writing, few details are available.

Would such a change make covered bond issuance—currently almost nonexistent in the U.S.—more attractive here?   The answer may lie in all the terms as yet undisclosed (and perhaps still undecided).