FDIC Chair Bair Still Sees Potential for U.S. Covered Bond Market

It's just one line in a Reuters story on a recent press conference held by FDIC Chairman Sheila Bair.  The story (April 23) consists solely of bullet points—apparently just a dressed-up version of the reporter's notes.

Here's the line that caught our attention:

"[Bair] Says [she] still sees potential for covered bond market."

FDIC Chairman Sheila BairWay back in February 2008, an earlier Reuters article paraphrased Bair to the effect that "covered bonds have many virtues that can make them safer investments than the mortgage-backed securities that proliferated during the recent housing boom and are being blamed in part for eroding lending standards."

At that time, Bair was quoted as saying "my sense is to try and accommodate" covered bonds "in an incremental way," to gain experience before "open[ing] the door" further.  

A major aspect of that "accommodation" was the FDIC's  release in July 2008 of its Covered Bond Policy Statement (Final).  That document aimed to facilitate "prudent" development of a U.S. covered bond market by specifying how it will treat such bonds in the event that an insured depository institution goes into conservatorship or receivership.

But of course, that was before the financial meltdown put big U.S. banks' plans for covered bond issuance on hold.

The topic surfaced again with Bair in January of this year, in the context of a possible "aggregator" facility to improve the liquidity of troubled banks using TARP funds.  Discussing what the aggregator might do with those assets, Bair told the Wall Street Journal:  "You might want to securitize some of them. You could do a covered bond issue."

Obviously, a bare mention of covered bonds by Bair this week-albeit in a positive tone-doesn't mean much.  But it shows at least that the topic has not been forgotten.