Words such as 'I'm from the government and I am here to help...' can strike fear in the hearts of even the most courageous. Yet every now and then, these words may turn out to be accurate. For instance, recently, the Chairman of the FDIC stated that U.S. regulators were working 'on ways to help the covered bond market's development' in the United States. Senior officials at the OCC and OTS have made similar observations. In the last two months, the Secretary of the Treasury has made statements indicating his interest in seeing a covered bond market develop in the U.S. Their basic theme is that the model of 'originating and distributing' mortgages and mortgage securities
exacerbated the credit crisis—formerly known as the subprime crisis. Covered bond structures require that mortgages or other assets remain on balance sheet.
Consequently, regulators reason this will have the effect of encouraging lenders to maintain appropriate loan underwriting standards. They also are well aware that the covered bond market has functioned in Europe without much drama for centuries. In fact, the market actually has held up relatively well over the last year, at a time during which investor skepticism of asset-backed and mortgage-backed securitizations has reached epic levels. So, what exactly are covered bonds and what does the FDIC say we should be doing about them?
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