By Mercy Jiménez
Co-founder of Covered Bond Investor

The much-anticipated Congressional hearing on covered bonds held December 15 appeared to show that even in the current polarized political environment, it is sometimes possible for both sides of the aisle to get behind a good idea. 

Covered bonds are a form of on-balance sheet financing that is widely used in Europe.   Bondholders are protected by dual recourse — both to the issuer and to a “cover pool” of assets.  Unlike securitization, with covered bonds any assets in a cover pool that deteriorate over time can be replaced or supplemented with better loans.

Members of the House Committee on Financial Services, led by Chairman Barney Frank, took a look at covered bonds as a much-needed possible additional source of funding in the U.S.  Comments by both Republican and Democratic committee members were favorable.

Talk at the hearing was peppered with references to accountability, prudent lending, attractiveness to private capital, “skin in the game,” bondholder protection, asset liability matching, simplicity, resilience and other qualities associated with this form of financing.   Covered bonds potentially could provide funding not only for mortgages, but also for student loans, auto loans, credit card receivables and small business loans.

Rep. Scott Garrett (R-NJ) — Congress’ most visible proponent of covered bonds — said at a press teleconference that one of his goals for the hearing was to get committee members on board with the basics of covered bonds and gain momentum for further action.  Although it is too soon to know for sure, he may have succeeded on both fronts.

Questions from the committee were fielded by five expert witnesses.  The line-up included a representative of fixed-income investors as well as one for the U.S. Covered Bond Council.

Although the focus at this hearing was on the potential merits (or drawbacks) of covered bonds rather than on specific legislation, there was substantial agreement that a detailed legislative framework would be essential for covered bonds to become a cost-effective funding source here (as it already is in Europe).  Rep. Garrett has been working on such a framework, and the next logical step would be a hearing on a specific covered bond bill.

At the hearing’s end, Chairman Barney Frank said: "This is a subject that the committee will be dealing with [again] next year."  The road from here to passage of a bill in the House and Senate is long, with plenty of pitfalls, but at least there is promise.