Bloomberg News

U.S. Election May Delay Covered Bond Rules, Deutsche Bank Says

November 17, 2011

Nov. 17 (Bloomberg) -- Legislation that could boost the covered bond market in the U.S. is likely to be delayed by next year’s elections, according to Malcolm Knight, vice chairman at Deutsche Bank AG.

The House Financial Services Committee advanced a bill in June to establish a viable U.S. covered bond market by giving the Treasury Department oversight and creating a separate resolution process. Covered bonds are typically considered safer by investors because they are backed by assets such as mortgages or loans.

“It is very likely that in these conditions they won’t go forward before the election and therefore that they will die in this congress and have to be reintroduced,” Knight told a Euro Finance Week conference in Frankfurt.

He said there should be harmonization of covered bond regulation in the European Union as well as with the U.S. as the instruments can contribute to the “stability and efficiency” of the financial system.

Covered bonds were pioneered in 18th century Prussia and they give holders first call on a pool of assets that’s managed by the borrower, with the debt given preferential treatment in a default to senior, unsecured notes.

In the U.S., legal uncertainty surrounds what happens if the issuer fails and bondholders and depositors both claim the bank’s assets.

There is “not very much support of the framework among U.S. financial institutions because they want to revive the securitization model that they had been using with more checks and balances, better incentive alignments,” Knight said.

Knight, a Canadian citizen, joined Deutsche Bank in New York in 2008 as non-executive vice-chairman to oversee the lender’s relationships with regulators and central banks.

--Editors: Michael Shanahan, Paul Armstrong

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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