Canada Moves Toward Covered Bond Legislation

The Canadian government has officially announced its intention to introduce legislation governing covered bonds, "making it easier for Canadian financial institutions to access this low-cost source of funding."

The announcement came in Ottawa as part of the latest Budget, tabled in Canada's House of Commons by Finance Minister James M. Flaherty (March 4).  The relevant portion reads:

"One of the lessons of the global financial crisis is that financial institutions 
need to have access to a variety of funding sources.  The Government will help federally regulated financial institutions diversify their funding sources 
by introducing legislation setting out a framework for covered bonds. 
Covered bonds are debt instruments that are secured by high quality assets, 
such as residential mortgages. The legislation will increase legal certainty 
for investors in these debt instruments, thereby making it easier for Canadian financial institutions to access this low-cost source of funding."

David Power of RBC heads the CBA's Covered Bond Specialists Group (Photo: Jason Rosenthal)In Europe, essentially all nations where covered bonds are issued have laws that specifically govern the instrument.  

Efforts to establish such legislation in Canada have been spearheaded by the Canadian Bankers Association (CBA) — specifically, its Covered Bond Specialists Group, which is chaired by David Power, an executive in Royal Bank of Canada's (RBC's) treasury department.

"We are very pleased that the Canadian government has recognized the importance of the covered bond market," Power told Covered Bond Investor™  (March 5).  "Covered bond legislation will complement the other sound regulations and policies relating to banks and mortgage lending in Canada."

In the absence of a specific law, RBC, Canadian Imperial Bank of Commerce (CIBC) and Bank of Montreal have obtained some funding through covered bond programs since a 2007 change in government regulations made them possible.  The most recent (in January of this year) was a $2 billion launch from CIBC, denominated in U.S. dollars and marketed to U.S. institutional investors.

But Power and others in the financial community believe a covered bond law will be a big step forward.

"Although we are confident in our existing product, legislation will remove an unnecessary hindrance to accessing the covered bond markets in the most effective manner possible," according to Power.  "We look forward to working with the government in an advisory role in developing the legislation."

Martin Fingerhut, a law partner in the Toronto office of Blake, Cassels & Graydon LLP Martin Fingerhut, has a similar view:

"I expect that having a legal framework, that will buttress the structured framework that has thus far supported the covered bonds issued by three Canadian banks, will make Canadian covered bonds more attractive to a number of European investors, and will also make it somewhat easier to obtain a AAA rating.  Discussions on this front with the Canadian authorities have been ongoing for over a year, and appear likely to bear fruit in the near future."

Enactment of a covered bond law in Canada would make the U.S. even more isolated in its lack of such legislation.   Congressman Scott Garrett (R-NJ) has proposed a comprehensive legal framework for the U.S., but this has not yet been incorporated into a bill.

To download a PDF of "Budget 2010: Leading the Way on Jobs and Growth" — which contains the commitment to introducing covered bond legislation — click on "Canada Budget 20100304" under "Attachment," below.