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LEGISLATIVE PROPOSALS TO CREATE A COVERED 

BOND MARKET IN THE UNITED STATES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MARCH 11, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–17 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 11, 2011 ................................................................................................. 1 

Appendix: 

March 11, 2011 ................................................................................................. 33 

WITNESSES 

FRIDAY, MARCH 11, 2011 

Andrews, Stephen G., President and Chief Executive Officer, Bank of Alameda ...................................................................................................................... 11 

Daloisio, Ralph, Managing Director, Natixis, on behalf of the American 

Securitization Forum (ASF) ................................................................................ 9 

Ely, Bert, Ely & Company, Inc. .............................................................................. 6 

Skeet, Tim, Chairman, Committee of Regional Representatives, International 

Capital Market Association ................................................................................. 8 

Stengel, Scott A., Partner, King & Spalding LLP, on behalf of the U.S. 

Covered Bond Council .......................................................................................... 4 

APPENDIX 

Prepared statements: 

Garrett, Hon. Scott ........................................................................................... 34 

Andrews, Stephen G. ........................................................................................ 36 

Daloisio, Ralph .................................................................................................. 44 

Ely, Bert ............................................................................................................ 68 

Skeet, Tim ......................................................................................................... 84 

Stengel, Scott A. ............................................................................................... 104 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Letter from the Honorable John Walsh, Acting Comptroller of the Currency, dated March 10, 2011 ........................................................................ 120 

Letter from Bert Ely providing additional information for the record, 

dated April 12, 2011 ..................................................................................... 122 

Written statement of the Federal Deposit Insurance Corporation (FDIC) .. 130 

Written statement of the National Association of REALTORS (NAR) ........ 146 

(1) 

LEGISLATIVE PROPOSALS TO CREATE 

A COVERED BOND MARKET 

IN THE UNITED STATES 

Friday, March 11, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:07 a.m., in room 

2220, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Schweikert, Campbell, Pearce, Hayworth, Grimm, Stivers; Waters, Maloney, Donnelly, and Carson. 

Chairman GARRETT. This hearing of the Subcommittee on Capital Markets and Government Sponsored Enterprises will come to 

order. Today’s hearing, of course, is titled, ‘‘Legislative Proposals to 

Create a Covered Bond Market in the United States.’’ Without objection, all members’ opening statements will be made a part of the 

record. 

And at this time, I will yield myself 2 minutes for my opening 

statement. 

I would like to welcome everyone here to the smaller committee 

hearing room, which is not reflective of anything to do with the importance of the topic that we are discussing today. 

As our Nation continues to recover from the recent financial crises in certain credit markets—as we know, Congress must examine 

new and innovative ways to encourage the return of private investment to our capital markets. We must also consider cleaner ways 

to enable the private sector to provide additional mortgage, consumer, commercial, and other types of credit as well. 

I believe establishing a U.S. covered bond market would further 

these shared policy goals. So, today we are here to examine legislative proposals to establish a covered bond market here in the 

United States. 

This past Tuesday, my good friend, the gentlewoman from New 

York, Mrs. Maloney, and I introduced H.R. 940, the U.S. Covered 

Bond Act of 2011. The legislation sets the foundation, if you will, 

for a U.S. covered bond market. And it does so by creating a regulatory framework and then detailing the exact process that occurs 

if an issuer fails. 

2 

One reason that I am particularly interested in covered bonds is 

the fact that they can be a purely private means, if you will, of finance in this area without government guarantees or subsidies. 

Many proposals will help alleviate the current strains on our credit 

market, and alternatives will focus on government loans or guarantees. But I believe that the current bond legislation offers an alterative, a way for the government to provide additional certainty 

to private enterprises and generate increased liquidity through innovation of a new marketplace, if you will, without putting the taxpayers on the hook. 

There are many potential benefits for a wide variety of interested 

parties that can be derived from the U.S. covered bond market. 

There are about four of them I can list. First, consumers will experience lower loan rates because of the additional liquidity in the 

marketplace and the various asset classes as well. Second, consumers will also be able to more easily have their loans modified, 

which we see is an issue right now because the loans will still be 

on the balance sheets of the originating institutions. 

Third, investors will have a new and transparent and secure vehicle to invest in. And this will allow for additional diversification 

within their portfolios. And finally, the broader financial markets 

will benefit. How? By having an additional low-cost, diverse funding tool for financial institutions. 

So covered bonds will ensure a more stable and longer-term liquidity in the credit markets, which reduces financing risk as well 

as exposure to the sudden changes in interest rates and investor 

confidence. And finally, they will allow U.S. financial institutions 

to once and for all to compete more effectively against their global 

peers. 

I look forward to hearing from the witnesses at our table today. 

And right now, I yield Ranking Member Waters. 

Ms. WATERS. Thank you, Mr. Chairman, for convening this hearing today to examine the potential for creating a covered bond market in the United States. Today, we convene to discuss covered 

bonds and Representative Garrett’s covered bond bill, H.R. 940. 

Covered bonds offer a way for financial institutions to raise funds 

by selling a bond that is backed by their institution’s assets, which 

were pledged as collateral. The assets under cover per pool remain 

on the balance sheet of the issuer. And the covered bonds provide 

dual recourse to both the cover pool and to the issuer. 

Covered bonds represent a potentially promising alternative to 

securitization. We know that securitization failed us in many ways 

leading up to the 2008 financial crisis, particularly as originators 

used securitization as a means to originate bad loans and then 

quickly transfer them off their books. This lack of ‘‘skin in the 

game’’ was a cause of the financial crisis and is something we addressed in the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

We also are seeing title problems in foreclosures stemming from 

banks not following proper legal protocols when structuring 

securitization deals. These problems are creating significant legal 

reverberations as banks’ ability to foreclose on borrowers is questioned. For these reasons, I am interested in exploring covered 

bonds more fully. I am also interested in learning more about the 

3 

potential limits of covered bonds, including whether the issuers will 

be able to accomplish the same environment of lending with this 

more capital-intensive system. 

I do not believe that covered bonds could constitute a full replacement for the government-sponsored enterprises. For example, 

each ratings makes in a recent report their buying capacity to covered bonds amounts to about 11 percent of the market 

securitization gap spending. 

I am also interested in learning more about the concerns of regulators, particularly whether covered bonds present risk to the FDIC 

when they try to resolve failed institutions. Given the main resolution responsibilities provided to the FDIC under the Dodd-Frank 

Act, we must ensure that their ability to protect the deposit insurance fund is protected. 

Again, I want to thank you, Mr. Chairman, for convening this 

hearing. And I look forward to exploring covered bonds more fully. 

I yield back. 

Chairman GARRETT. I thank you for your statement. I thank you 

for those questions, as they are on point with what we need to discuss. I appreciate you bringing those up. 

The gentleman from California, Mr. Campbell, for 2 minutes. 

Mr. CAMPBELL. Thank you, Mr. Chairman. There is wide agreement that we will be winding down Fannie Mae and Freddie Mac. 

But there is not yet agreement, or a decision, and a lot of what we 

will be doing in this subcommittee and in this committee is discussing what we are going to replace it with. 

I happen to be one of those people who believes that we cannot 

replace it with nothing. And without getting into details on my reasoning, that we cannot leave something with as gigantic an impact 

on the economy as the entire housing market open to the vicissitudes of the general ups and downs of credit markets without some 

support and stabilization mechanism. 

I have been very vocally supportive of what is called the public 

utility model. I know the Treasury Secretary hates that term. But 

he prefers more a reinsurance of government, reinsurance policy 

where instead of having a government guarantee, as Fannie and 

Freddie did that was implicit and unlimited, that we have ones instead that are explicit, but very limited. 

However, that being said, I am here today because I am open to 

being convinced otherwise that the covered bond option is a better, 

stronger or equal option to that. And so, I look forward to the testimony and to the entire discussion today. 

Thank you, Mr. Chairman. I yield back. 

Chairman GARRETT. And I thank you. 

The gentlelady from New York for 2 minutes. 

Mrs. MALONEY. Thank you. I will place my opening statement in 

the record, in the interest of time. And we have a very strong 

panel. I am looking forward to hearing your statements. 

But I particularly thank the chairman, really, for his commitment on looking for ways to increase the flow of credit and provide 

liquidity to the securities markets. He has worked on this issue 

with great commitment over several years. And I am pleased to 

support him in his latest effort on covered bonds, which are successful in Europe. I look forward to gaining more insight into how 

4 

those should be regulated. In the way it has been drafted now, 

there would be no government guarantee, but has the promise of 

really providing liquidity to our markets and helping. 

So I will place my statement in the record and look forward to 

the comments from the panel. Thank you. 

Chairman GARRETT. And, as I said before you came in, thank you 

so much for joining with me in this legislation. 

Mrs. MALONEY. Thank you. I look forward to it. I think it is very 

promising. I think it is exciting. It may be part of the answer. 

Chairman GARRETT. Thank you. I appreciate it. 

The gentleman from New Mexico, for 2 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman, for having the hearing. 

I will place my comments into the record also, but appreciate the 

opportunity to come and listen in on the hearing. 

Chairman GARRETT. Does the gentleman from New York seek 

time? 

Mr. GRIMM. Just 1 minute, Mr. Chairman. First of all, I thank 

the panel for coming today. I appreciate the opportunity to have a 

discussion and certainly look for more solutions as we reflect on 

what has happened in the housing market and we look for the innovation and the creativity that the United States really should be 

driving in the marketplace and elsewhere. 

So I will place my full statement in the record because I am 

eager to get to the questions and get the debate started. So thank 

you, Mr. Chairman. I yield back. 

Chairman GARRETT. And I thank you. 

If that is all the statements, I now look to the panel and Mr. 

Stengel to go first for 5 minutes. And your complete statement, obviously, will be made a part of the record. We thank you for joining 

us today. 

STATEMENT OF SCOTT A. STENGEL, PARTNER, KING & SPALDING LLP, ON BEHALF OF THE U.S. COVERED BOND COUNCIL 

Mr. STENGEL. Thank you. Chairman Garrett, Ranking Member 

Waters, and members of the subcommittee, I am grateful for your 

invitation to testify today on the crucial role that U.S. covered 

bonds can play in stabilizing our financial system and in contributing to our economic recovery. I am a partner with King & Spalding and a member of the steering committee for the U.S. Covered 

Bond Council. 

The Council is comprised of investors, issuers, dealers, and other 

participants in the covered bond market. And we strive to develop 

policies and practices that harmonize the views of these different 

constituencies and that promote a vibrant market for U.S. covered 

bonds. 

When I last testified before the full committee in December 2009, 

the economic recovery was slow and uneven. Fifteen months later, 

little has changed. Almost 17 percent of Americans remain unemployed or underemployed. Nearly one out of every four homeowners 

is still underwater on a mortgage. 

A record percentage of commercial mortgage loans are delinquent. And for Fiscal Year 2012, 35 States and the District of Columbia are projecting budget shortfalls. 

5 

In the Council’s view, sustained economic growth begins with a 

stable financial system. While the Dodd-Frank Act has revamped 

the regulatory landscape, there is still an unmet need for long-term 

and cost-effective funding from the private sector capital markets 

that can be translated into meaningful credit for households, small 

businesses, and the public sector. 

We believe that covered bonds are an untapped but proven resource that could be invaluable in meeting this need. We also believe that the time for U.S. covered bonds is now. 

At its core, a covered bond is simply a form of high-grade senior 

debt that is issued by a regulated financial institution and that is 

secured by a dynamic cover pool of financial assets. What distinguishes covered bonds from other secured debt is a legal framework 

for managing and maximizing the value of this cover pool after the 

issuer’s default or insolvency. And if the cover pool is adequate, 

continuing scheduled payments on the covered bonds. 

Over the course of their 240-year history, covered bonds have 

been backed by a wide array of asset classes that benefit from stable, long-term liquidity and that are significant to national economies. U.S. covered bonds can stabilize our financial system and 

contribute to the economic recovery in several ways. 

First, with maturities that extend out to 10 years or more, covered bonds can infuse longer-term liquidity into the credit markets 

as a complement to the shorter-term funding that is supplied 

through the Federal Home Loan Banks and the securitization and 

repo markets. 

Second, by providing more cost-effective liquidity for lenders, covered bonds can produce less expensive and more available credit for 

consumers, small businesses and the public sector. 

Third, covered bonds can add funding from a separate investor 

base that would not otherwise make this liquidity available 

through other markets. 

Fourth, covered bonds can deliver funding from the private sector 

even in distressed market conditions without any explicit or implicit government guarantee. 

Fifth, because the issuers continue to own the assets in their 

cover pools and have 100 percent ‘‘skin in the game’’ incentives related to loan underwriting, performance and modifications can be 

strongly allied. 

And sixth, as a straightforward financial instrument, covered 

bonds can increase transparency and uniformity in the capital markets. To function successfully, however, a U.S. covered bond market 

must be deep and highly liquid. And that requires the kind of legal 

certainty that only legislation can provide. Covered bonds developed in Europe under dedicated legislative frameworks in this 

precedent now found in almost 30 other countries have set expectations. 

The twin pillars of such a framework are: one, public supervision 

by a covered bond regulator that can protect the interests of investors, free of any conflict of interest like the FDIC’s duty to the Deposit Insurance Fund; and two, a separate resolution process that 

is clear and unequivocal and that is designed to avoid a forced acceleration of the covered bonds and a wasteful fire sale of the cover 

pool. 

6 

These two pillars, which afford the legal certainty required for 

investors to dedicate funds to this market, cannot be replicated by 

regulatory action alone. Without action by Congress, European and 

other non-U.S. issuers will be left to fill the void. 

In 2010, they targeted over $27 billion in U.S. dollar covered bonds to investors in the United States, and over $55 billion more 

is expected in 2011. The result is an increasingly uneven playing 

field for U.S. institutions of all sizes and more expensive and less 

available credit for families, small businesses, and the public sector. 

The Council, therefore, fully supports covered bond legislation of 

the kind introduced by Chairman Garrett and Representative 

Maloney as H.R. 940. And I want to thank them for their leadership. I would be pleased to answer any questions that members of 

the subcommittee may have. 

[The prepared statement of Mr. Stengel can be found on page 

104 of the appendix.] 

Chairman GARRETT. Thank you for your testimony. 

Mr. Ely? 

STATEMENT OF BERT ELY, ELY & COMPANY, INC. 

Mr. ELY. Chairman Garrett, Ranking Member Waters, and members of the subcommittee, I very much appreciate the opportunity 

to testify today about covered bonds and H.R. 940, which will create the legal framework for a vibrant U.S. covered bond market. 

Covered bonds offer important attributes which are often overlooked or misunderstood. They include the following: First, covered 

bonds will not be explicitly or implicitly backed by the Federal Government. Clearly, H.R. 940 does not provide an explicit Federal 

guarantee of covered bonds issued under the provisions of this bill. 

Further, no provision in H.R. 940 even suggests an implicit Federal 

guarantee of covered bonds. 

There is widespread and legitimate belief among investors that 

when a GSE bond default threatens, the implicit Federal guarantee 

of that debt, by virtue of the issuer’s GSE status, will become explicit, as has been the practical effect of the Fannie Mae and 

Freddie Mac conservatorships. Covered bond issuers will not have 

GSE-like Federal charters. 

Further, Federal regulation of covered bond issuance is no more 

a government guarantee of covered bonds than is the regulation of 

securities insurance by the SEC. The covered bond regulator will 

merely ensure that covered bonds will at all times be purely private sector credit instruments of the highest possible credit quality. 

Second, covered bonds will enhance the ability of lenders to offer 

30-year, fixed-rate mortgages because covered bonds can be issued 

with medium- and long-term maturities at a fixed rate of interest. 

Therefore, banks will be able to profitably hold 30-year, fixed-rate 

mortgages in portfolio because the interest rate spread on such 

loans will be locked in at the time the mortgage is made. 

Third, covered bonds do not represent GSE reform. While covered 

bonds will become an important element of American housing finance once a strong covered bond statute is enacted, the issuance 

of covered bonds will have no direct bearing on the eventual resolution of Fannie and Freddie. Instead, covered bonds should be 

7 

viewed as putting another horse in the housing finance horse race, 

which will bring sound, low-cost financing to American residential 

finance as well as to other classes of financial assets suitable for 

covered bond financing. 

Fourth, community banks will be able to issue covered bonds due 

to the bill’s pooling provision. This provision will enable community 

banks and even larger banks, each too small to sell their covered 

bonds directly to investors, to join together to sell the covered 

bonds they issue into a covered-bond pool that in turn will sell covered bonds to investors. In effect, the covered bonds issued by the 

pool will be secured by the covered bonds sold into the pool by its 

participants. The covered bonds sold by a participating bank into 

the pool will in turn be secured by the assets in that bank’s cover 

pool. 

Fifth, authorizing non-bank firms to issue covered bonds, as the 

bill provides, will broaden the range of covered-bond issuers, which 

in turn will provide greater depth and liquidity to the covered bond 

secondary market, bringing the efficiencies of covered bond financing to a broader range of borrowers. 

Sixth, covered bonds will be a money maker for the FDIC. In just 

20 days, the FDIC assessment base will expand from total domestic 

deposits to total global assets minus tangible equity capital. In effect, FDIC assessments will become a tax on bank liabilities, including covered bonds, whether insured by the FDIC or not. 

Assuming a 10-basis-point annual premium rate, the FDIC will collect $1 million dollars annually for every billion dollars of covered bonds outstanding. Yet, the FDIC’s additional realized losses 

due to those outstanding covered bonds will be minimal. 

Widespread use of covered bond financing will deliver numerous 

benefits to the U.S. economy, specifically the safety and efficiency 

of financing home mortgages and other types of credit. Better lending will be one of the principal benefits of covered bonds because 

covered bonds will be backed by loans that lenders make and then 

keep on their balance sheet rather than selling those loans into the 

securitization marketplace. 

Lenders keeping the loans they make will eliminate the moral 

hazard inherent in the securitization process. When a lender keeps 

the mortgages it makes by funding them with covered bonds, it will 

retain 100 percent of the credit risk and 100 percent of its lending 

mistakes. It will eat its own cooking. 

This is far preferable to the 5 percent retention mandated for 

home mortgages by the Dodd-Frank Act. Covered bonds will enhance bank safety and soundness by providing the means for banks 

to safely fund high-quality assets, such as conservatively underwritten mortgages. For example, instead of selling the fixed-rate 

mortgages it originates, thereby weakening its relationship with 

those borrowers, a bank will be able to keep those mortgages, 

which will deepen its relationship with its borrower-customers. 

This stronger relationship will enhance the bank’s franchise value. 

Other benefits include: stronger borrower protections—for a default situation, loan modifications will be much less complicated; 

highly-efficient bank funding because covered bonds will have highcredit ratings and low transaction costs; reduced maturity 

mismatching by lenders; a reduction in interest-rate risk; and a 

8 

substantial new supply of high-quality debt for investors to purchase, especially international investors. 

Mr. Chairman, I thank you for the opportunity to testify today. 

I welcome the opportunity to answer questions posed by members 

of the subcommittee. 

[The prepared statement of Mr. Ely can be found on page 68 of 

the appendix.] 

Chairman GARRETT. Thank you for that. I only came up with 

three good reasons for covered bonds, so I appreciate that. 

Mr. ELY. My written statement has even more. 

Chairman GARRETT. Even more—I can only imagine. 

From the International Capital Markets Association, Mr. Tim 

Skeet, for 5 minutes. 

STATEMENT OF TIM SKEET, CHAIRMAN, COMMITTEE OF REGIONAL REPRESENTATIVES, INTERNATIONAL CAPITAL MARKET ASSOCIATION 

Mr. SKEET. Chairman Garrett, Ranking Member Waters, and 

members of the subcommittee, I am pleased and honored to be here 

today to share some thoughts on behalf of the International Capital 

Markets Association in Europe on the proposal for the creation of 

a covered bond market in the United States. 

There is, as we all know or perhaps as we have all discovered, 

a lot of complexity in financial markets and the instruments found 

therein. But covered bonds are not complex by their nature. They 

are not risky by their nature. This is a simple product, which, as 

my paper indicates, has done well in Europe. And it serves the 

banks, the regulators and the European taxpayers well. The paper 

I brought charts the performance of this asset class and points to 

its essential ingredients. 

It also sets out how this asset class did not need the benefit of 

government guarantees or subsidies, just solid legislation and prudence. I am here today to say how much we in Europe welcome the 

work going on, on covered bonds in the United States. That is not 

to say that the United States needs a carbon copy of what we have 

in Europe. Indeed, it is right that you design a market for your 

own needs. 

Nevertheless, there are good lessons to be learned from the European experience. We have learned simply to keep it simple, go for 

quality assets and make investors feel confident. Covered bonds 

worked in Europe despite the crisis on account of three irrefutable 

characteristics that meant that the market functioned. And today, 

it represents the strongest and the most reliable source of term 

funding for European banks. 

Those three characteristics are: high-quality collateral; a robust 

legal framework; and solid supervision. We also note it has not just 

been the European investors that have supported the market for 

covered bonds. As we already heard, U.S. institutional investors 

have been doing their homework, and they increasingly like what 

they see—bullet maturities, cash-flow certainty and an enviable 

track record of no defaults. This is close to what we once referred 

to as a rates-type product in the market. 

We note that there is work to be done on detailed regulations 

and limits, on getting a regulator up to speed and so on. This is 

9 

serious work. In Europe, for instance, regulators already recognize 

that banks cannot simply be funded by pledging collateral. Some 

considerable thought has gone into encumbrance levels, particularly like a Basel III and the concept of the net stable funding 

ratio. 

In the United Kingdom specifically, limits on covered bond 

issuance have been set and have been monitored for years. Work 

continues on this and across Europe, also on the standards of collateral transparency. This work is relevant here also. 

Covered bonds in Europe have, moreover, allowed a lot smaller, 

and in some cases weaker, financial institutions to fund themselves 

on a term basis, illustrating the simple fact that stable funding 

contributes to a reduction in the probability of a default, and it 

makes the overall system a safer and more stable place. 

As investors do a lot more of their own due diligence and homework, they look for certainty, and they look for safety. This bill 

gives them the basis for legal certainty, but it does not completely 

remove, it just diminishes, the credit risk. In Europe, we view covered bonds as part of the solution, not part of the problem. We believe that it can and should work also here in the United States. 

Moreover, we believe that they are straightforward and deliverable, give U.S. investors a chance to buy covered bonds issued by 

U.S. institutions, allow U.S. private sector money back into the 

U.S. mortgage market and not just be there for the Europeans and 

the Canadians, as we have seen. Covered bonds are not the complete answer to the future of mortgage finance in the United 

States. But it could and it should be one practical element in the 

solution. This product, covered bonds, can play a part. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Skeet can be found on page 84 

of the appendix.] 

Chairman GARRETT. I thank you for your testimony. 

And now, from the American Securitization Forum, and also representing the 5th Congressional District in the State of New Jersey 

as well, Mr. Daloisio is recognized for 5 minutes. 

STATEMENT OF RALPH DALOISIO, MANAGING DIRECTOR, 

NATIXIS, ON BEHALF OF THE AMERICAN SECURITIZATION 

FORUM (ASF) 

Mr. DALOISIO. Thank you, Chairman Garrett, Ranking Member 

Waters, and distinguished members of the subcommittee for the opportunity to testify before you today. Can we restart? All right. 

Thank you. 

I promise I won’t move. I will stay in the 5th District. 

Thank you, Chairman Garrett, Ranking Member Waters, and 

distinguished members of the subcommittee for the opportunity to 

testify before you today on behalf of the 330 institutional members 

of the American Securitization Forum and in particular, its 60-plus 

pension funds, mutual funds, and insurance company members, 

which collectively manage trillions of dollars of Main Street’s financial assets. 

Assuming a legislative U.S. covered bond market is established, 

our members will have a leading and lasting role in this new financial instrument, much like they did over 25 years ago with the creVerDate Nov 24 2008 16:44 May 13, 2011 Jkt 065675 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\65675.TXT TERRIE
10 

ation of the first asset-backed security. As we gather today, there 

is a vibrant market in covered bonds, which has raised over 2.5 

trillion euros in secured financing for over 140 credit institutions 

from 29 countries. These issuers benefit from a deep and liquid 

market, more stable asset liability management and lower financing costs that are transmitted to their customers, individuals, companies, and small businesses. 

Despite the benefits obvious to so many other sovereign banking 

systems, American banks are noticeably absent from this market. 

Meanwhile, U.S. institutional investors have become active investors in covered bonds beginning last year when they purchased 

over $30 billion issued by foreign banks. Half of this issuance came 

from Canadian banks, which crossed our financial borders to tap 

investor demand for high-quality, private-sector, fixed-income investments. In the absence of a comparable alternative from our domestic banks, those dollars have left our country to the benefit of 

other financial systems. 

Chairman Garrett, your effort last year to legislate into existence 

a U.S. covered bond market was the right idea at the right time, 

which has now been validated by the flow of U.S. dollars into exactly these types of investments. As you recognize, without the 

right kind of legislation, there will be no U.S. covered bond market. 

Earlier attempts in 2006 by Washington Mutual and Bank of 

America remain the only isolated cases of U.S. covered bond 

issuance. The financial crisis highlighted the weakness in the contractual legal framework under which those covered bonds were 

issued and discouraged investor participation. 

The Treasury Department and the FDIC collaborated in July 

2008 to set policy and guidelines to promote the development of 

U.S. covered bonds. But not one dollar of issuance followed. 

It should be clear by now that a U.S. covered bond market can 

only be seated by a specific enabling act of legislation, which has, 

at its cornerstone, a dedicated legal framework for the treatment 

of covered bonds in the event the issuer becomes insolvent. This is 

the case in every country that supports a vibrant covered bond 

market. The lack of such a legal framework in the United States 

is the single best explanation for a nonexistent U.S. covered bond 

market. 

The final policy issued by the FDIC in 2008 to encourage a U.S. 

covered bond market remains unchanged and insufficient. Current 

FDIC insolvency authorities afford the FDIC actions adverse to investor interests, including the authority to liquidate the cover pool 

at a loss to investors. Covered bond holders need legal certainty 

that the insolvency of the issuer will not result in a market liquidation of the cover pool and an early return of their investments at 

par value or less. 

Accordingly, legislation is required to curb FDIC authorities over 

covered bonds in order to bring those authorities in line with the 

legal frameworks in use elsewhere around the world. The systemic 

benefits of enabling banks and non-banks to issue covered bonds 

under a legislative framework would appear to vastly outweigh the 

concerns such as the fear that covered bonds could increase the 

risk of loss to the FDIC’s Deposit Insurance Fund and therefore, 

to the U.S. taxpayer. 

11 

Covered bond investors are not entitled to receive more than the 

return of their original investment at the contracted rate of interest. In an issuer’s insolvency, if there were a deficiency between the 

cover pool and the covered bonds, covered bond holders would be 

treated as unsecured creditors of the issuer for the amount of the 

deficiency. 

This unsecured claim would run pari-passu with other unsecured 

claims, while depositors would have a more senior rank. Moreover, 

any excess cover pool collateral existing after the scheduled repayment of the covered bonds would revert to the insolvency estate, 

not to the covered bond holders. 

Also, the Dodd-Frank Act strengthened the DIF by granting the 

FDIC the ability to achieve goals for DIF fund management that 

it had sought for decades. In our view, the contrary concerns are 

far more troubling, namely, the concern that we failed to encourage 

the necessary resurgence in private sector finance to accelerate an 

orderly exit from the excessive fiscal and monetary support measures that remain, including the continued overreliance on the GSEs 

and FHA to finance our mortgage system when most other developed nations finance those privately. A new market like covered 

bonds can enable the process of replacing public sector subsidies 

with private sector initiatives and prime the process for resolving 

the GSEs. 

Thank you for your time and attention to my testimony. And I 

look forward to your questions. 

[The prepared statement of Mr. Daloisio can be found on page 44 

of the appendix.] 

Chairman GARRETT. I thank you for your testimony. 

Mr. Andrews, for 5 minutes. 

STATEMENT OF STEPHEN G. ANDREWS, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, BANK OF ALAMEDA 

Mr. ANDREWS. Mr. Chairman, Ranking Member Waters, my 

name is Steve Andrews. I am pleased to appear before you today 

at this important hearing covering the United States Covered Bond 

Act of 2011. 

I am a community banker. I guess I am sitting with a bunch of 

capital market guys. We jealously guard our community bank franchises, and we jealously guard our relationships with our constituents. 

Community banks are conservatively run. I am pleased to 

present testimony today and raise a couple of concerns that I have 

as a community banker about the possible development of a covered bond market in the United States. And to cut to the chase, 

I am going to speak to you today as a community banker, a banker, 

not a capital market individual who is interested in his investors. 

I think, in my opinion, that we have a covered bond market 

today, and that is called the Federal Home Loan Banking system. 

That has been around for a long time. It is operated very, very 

well. I am not sure or certain that we need to import from Europe 

or from other places a system that differs when we have a tool in 

place today. And I see that this new system would largely benefit 

the largest banks. 

12 

By contrast, the Federal Home Loan Bank today is alive. It is vibrant. It is doing its job. During this downturn when we saw the 

financial crisis, they stepped up. As you all are aware, they have 

the ability for the balance sheet to expand and contract to provide 

the very liability that we are talking about here today through advances. 

They provide the liquidity. They stepped up for the community 

banks and all the small banks during this crisis and became a 

lender. The correspondent banks, the banks that you will see these 

assets go to, they didn’t. They stayed away from the community 

banks. 

The Federal Home Loan Bank, during the height of this mortgage crisis, 2007, 2008, provided member institutions $250 billion 

in advances. When the credit markets were frozen, both large and 

small banks were able to provide themselves through the Federal 

Home Loan Bank. In sum, the Federal Home Loan Bank manages 

mortgage collateral differently. 

They take haircuts. They don’t take collateral pools. They know 

their customers. A community bank can go to the Federal Home 

Loan Bank, customize in advance to fit their needs. It is not a cookie-cutter, take a 10-year bond, take a 7-year bond. They customize 

that. And for that, they are more flexible than the covered bond 

market. 

I am not here today to bash the big banks. The big banks certainly have their place in the Federal Home Loan system, and they 

also provide by their usage low-cost, cheap deposits, which we all 

benefit from. 

My understanding of the covered bond market is that it is a 

recosted obligation. And we have heard that described before as 

what remains on the balance sheet of the institutions. Covered 

bonds provide funding to a bond issuer, and the issuer retains a 

pool of assets related credit risks on its balance sheet. Therefore, 

in contrast to the mortgage-backed securities where secured assets 

are off the balance sheet, the issuer pool assets remain on the balance sheet. 

Interest on covered bonds are paid the investors from issuers’ 

general cash flows, while the pool of assets serve as collateral on 

those products. If the assets become nonperforming, typically what 

transpires is they are told to, or they by contract will bring another 

replacement asset. The issuer must always be overcollateralized. 

And so, they have an overcollateralization going on. That is the 

covered bond market. 

Where the majority of these purchases have maturities that are 

shorter—7, 10, 15 years—we have heard talk that they can match 

and help our market. We have 30-year mortgages. I see, unfortunately, the lion’s share of the benefits of the covered bond market 

going to the largest banks. 

As I sit here today, the debate in Congress has been on ‘‘too-bigto-fail.’’ And now we are going to push all these mortgages onto the 

balance sheets of the biggest banks, which we already have systemic risk issues with. To me, that is interesting. 

In Europe, it is touted. I don’t see that Europe doesn’t have problems. I have heard the acronyms of the PIGs. I have heard issues 

13 

over there. It is not an elixir or a magic bullet. Those markets froze 

up just as ours did during that time. 

The United States has over 7,000 banks—7,000 banks—while 

Germany and other European countries have three, four, and 

maybe a spattering of small banks. These are different models. Our 

financial systems are slightly different. The latter financial market 

was fewer, larger banks are more conducive to this. 

We have talked about the ability of smaller community banks; 

they might be at a disadvantage because of pooling. If you throw 

an intermediary into this process, we can’t compete. 

Big banks have deal flow. Small banks don’t have deal flow. They 

don’t have a ton of loan mortgages hitting their balance sheet every 

day. But they are the fabric of the communities, which are your 

constituents. They need a process of which to make these loans. 

I think that there will be a competitive disadvantage to the community banks on pricing by the pool, not to mention, when you pool 

together, there is a little bit of a consolidation that is going on. I 

think that we have a system that works today with the Federal 

Home Loan Bank. 

In addition, what I didn’t hear from anyone here is, what about 

the borrowers? What about our low- to moderate-income borrowers? 

They are going to get frozen out. These products typically require 

large downpayments and short maturities. I think we need to address our borrowers as well. 

In the FDIC, it does have concerns. If you read through that 

process, they are concerned about resolving these large banks when 

they go. 

I see that my time is up on the red dot there. So I am happy 

to address questions when they come available. 

But in closing, I would like to say that, in summary, I don’t want 

to see a 30-year mortgage harmed. I think we have a robust Federal Home Loan Bank handling the intermediary role that it was 

designed to do by Congress. 

I think that small banks need to be at the table. They need to 

be able to play. They need to be able to get advances from the Federal Home Loan Bank at a reasonable cost. 

And I think we need to deal not just with the investors. We need 

to deal with our borrowers. Our borrowers need to chase the American dream. 

In Europe, homeownership is about 50 percent. I want my children, my grandchildren to have ownership. I want them to be able 

to chase the American dream. A covered bond market has very 

strict underwriting guidelines. And that is why you see homeownership so small in European countries. 

Thank you for your time. 

[The prepared statement of Mr. Andrews can be found on page 

36 of the appendix.] 

Chairman GARRETT. Thank you, Mr. Andrews. 

And thank you to the entire panel. 

Let us begin with questions. I will probably just go from the left 

to the right and run down some points I would like to make or ask 

about. 

Maybe I will start off; the ranking member is not here right now, 

but she raised some good points during her opening statement. One 

14 

of them, and I go to Mr. Stengel on this, raised the concerns that 

the FDIC has raised, specifically regarding the impact of covered 

bonds on the DIF. Do you want to just chime in on that to respond 

to that concern? 

Mr. STENGEL. Sure. Thank you, Mr. Chairman. I grew up as a 

bankruptcy lawyer, so if there is anyone who is empathetic to the 

concerns of the FDIC, I would like to think that I am at the top 

of the list. 

Whether resolving any distressed organization, any failed organization is very, very difficult. Our regulatory system is balkanized. 

Unlike most other countries that have one or two regulators focused on banks during their lives and in the resolution, we have 

divided that up in the United States. And so, we have an institution, the FDIC, that is focused solely on resolution, similar on the— 

for banks. 

And I think that creates an institutional bias that is built in as 

a matter of statute for focused on concerns about resolution. So I 

would divide their concerns into two buckets. One would be a desire to control all aspects of a resolution, to control anything that 

touches upon the resolution of a bank. Again, the likely economic 

incentives for the FDIC—it is very understandable that would be 

something that they would want. 

They sought broader powers under Dodd-Frank, which they got. 

They have sought to seek—to regulate securitization, for example, 

secured borrowings, which they have sought to do and to take similar actions. And so, I think on the covered bond legislation that has 

been proposed, their desire to control the resolution of the covered 

bond program levered them to allow that to happen as part of the 

private market and under this legislation, again, an understandable concern, one that, in my mind, from the covered bond markets 

perspective, is misplaced for a couple of reasons. 

One, in the United States, we have incredibly debtor-friendly 

laws, creditor-unfriendly laws compared to other jurisdictions. And 

that has historically put us at a disadvantage. And so, the FDIC 

has very broad powers. They are vaguely defined. And the FDIC 

also has government-funded litigation to back those up. 

And so, that puts private investors at a disadvantage. And investors in covered bonds have said, ‘‘We are not comfortable with the 

FDIC and the optionality that the FDIC has.’’ 

Mr. ELY. Mr. Chairman, if I could just add to that? I have been 

a student of FDIC finances for over 25 years. I have looked closely 

at their numbers, particularly under the new assessment scheme. 

Covered bonds will actually generate a substantial profit, or, if you 

will, additional income for the FDIC. For the DIF, that income will 

far exceed any additional loss that the FDIC might suffer because 

of covered bonds. 

Chairman GARRETT. Okay. As long as you are speaking, let me 

ask you another question. Mr. Andrews raised a couple of interesting points, I thought. One point he raised was with regard to 

the Federal Home Loan Bank and what have you. Can you just, 

not rhetoric, but just sort of address that issue? 

Mr. ELY. There will still be a role for the Federal Home Loan 

Banks. In effect, covered bonds will be another form of bank fundVerDate Nov 24 2008 16:44 May 13, 2011 Jkt 065675 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\65675.TXT TERRIE
15 

ing. The whole idea of covered bonds is to put another channel of 

financing out there for depository institutions of all sizes. 

Some have speculated that the Federal Home Loan Banks might 

be more competitive in the shorter maturities, whereas covered 

bonds would be more appropriate for longer-term maturity debt. 

But there is room for both, covered bonds and the Federal Home 

Loan Bank system, going forward. And again, to emphasize, the 

pooling provision in the legislation would enable commmunity 

banks to access the covered bond market in the same way that 

larger banks can, but through a pooling process. 

Chairman GARRETT. Yes, and I can go into this in a lot of detail, 

and I would like to, but—Mr. Skeet, you are here as well. Talk to 

us a little bit more. I would appreciate the international flavor that 

you bring to this as far as what is going on in Europe and what 

have you. But one of the aspects of it is—I have heard some stories—the absence or lack of absence, if that is a word, of the backing in Europe, vis a vis that we are trying to do here. Can you 

touch upon that? Some say that in Europe you had a covered bond 

market that was successful to varying degrees, but because there 

was implicit guarantee? 

Mr. SKEET. Right. 

Chairman GARRETT. We are trying to say here— 

Mr. SKEET. I hope— 

Chairman GARRETT. —in our legislation there is no explicit, 

there is no implicit, there is no guarantee. 

Mr. SKEET. And that is the right road to take. I think I have 

been clear, and we have made clear in the statement that we have 

submitted, that there are no guarantees. During the height of the 

crisis, some of the national regulators did offer guarantees. I think 

there was one case, in the case of Ireland, and we know what happened in Ireland, where explicit guarantees were given. That was 

the exception, not the rule. 

Guarantees were not given. And the investors and the work they 

have done do not factor in government support. 

Chairman GARRETT. So it is not priced— 

Mr. SKEET. So there is no— 

Chairman GARRETT. —it is not priced into it? 

Mr. SKEET. It is not, no. Look at the way that this market has 

come back. It has come back phenomenally strongly, post-crisis. 

And we have not had a default of any covered bond. We have had 

banks go down, but we have not suffered any of the consequences 

of that through the covered bond market. 

Now, there are no implicit guarantees. What there is, and we 

mustn’t confuse the two things, there is explicit legislation. And 

there is good supervision provided by arms of the state. But that 

is not the same as any form of guarantees. Nor do the investors 

factor that in. 

That is the very important point that needs to be made. And people fudge that. The fact that you have given a law to provide a 

framework doesn’t mean you have given State support. 

Could I perhaps just take up another point that was being raised 

here about the— 

Chairman GARRETT. Yes. 

16 

Mr. SKEET. —size of the issuers? Because in Europe, we do have 

much smaller financial institutions that have been able to tap into 

the covered bond market. For instance, in Norway, we have a lot 

of very small regional savings banks that collectively come together 

and have successfully issued in various markets. This includes a 

transaction that came to the United States market late last year. 

And that actually proves that you can have, through the covered 

bond instrument, the ability for the smaller institutions to compete 

and get the same pricing terms as the larger institutions. I think 

that is an important point to make as well. 

Chairman GARRETT. I am curious as how that works as far as 

replenishing the pool when you have that pooling. But my time is 

up. 

So, I yield now to the gentlelady from New York. 

Mrs. MALONEY. Thank you very much, Mr. Chairman. 

And thank you to all the panelists. 

I would like to ask anyone on the panel who would like to discuss 

it, how covered bonds could facilitate housing finance, which is the 

challenge in the country now. 

Mr. ANDREWS. I would like to respond to that first, if I may. 

Mrs. MALONEY. Yes. 

Mr. ANDREWS. I think that it is a little bit of an issue. Today, 

as I mentioned in my testimony, the American dream is homeownership. It always has been. My father returned from World War II. 

That was the dream: to own a home. 

When I look to the European markets, I see 50 percent and less 

of homeownership. I see all the loans with large downpayments, 

strong credit underwriting to protect the investor. And, as I mentioned earlier, this is also a housing issue. 

This is getting people in homes and having them stay in homes. 

It is not just about an investor never losing a dime. We have a big 

issue in front of us. And I think when you start to require tremendously large downpayments, you have very strong underwriting criteria, you freeze out a lot of the market. You freeze out a lot of the 

American dream for your own constituents. So I don’t see that as 

favorable. 

Mrs. MALONEY. Yes. 

Could the others comment on how it would affect the financing 

of the housing market and also, the fear covered bonds would 

produce? 

Mr. ELY. If I could address that. First of all, covered bonds, because they are so well secured and generally AAA rated, would 

bring banks, including community banks, a relatively low cost of 

funding, certainly comparable to what they would be able to get 

from the Federal Home Loan Banks for longer maturities. 

Second of all, covered bonds can be issued for relatively long maturities, which makes them highly desirable to enable banks to 

hold on-balance-sheet 30-year, fixed-rate mortgages, keeping in 

mind that most 30-year mortgages get paid off long before 30 years 

have expired. So I see covered bonds as a way to bring back onto 

bank balance sheets mortgages that banks now feel compelled to 

sell because they can’t fund them safely. 

17 

That becomes very powerful in terms of lenders keeping all of 

their risk, and underwriting appropriately. That becomes a very 

powerful positive of covered-bond funding. 

Mrs. MALONEY. So are you saying, Mr. Ely, that covered bonds 

would not be sold in the secondary market? 

Mr. ELY. Covered bonds certainly would be sold by investors. 

That is one of the reasons to bring on a large covered bond market, 

so that you develop liquidity so investors could sell. But the key 

here is that the mortgages would stay on a lender’s balance sheet, 

the individual covered bond issuer, and then once the bonds are in 

the market, they could be bought and sold the same way any other 

type of debt instrument can be. 

Mrs. MALONEY. Okay. 

Mr. STENGEL. If I could just supplement that with one point, and 

it is probably fairly elemental, so my apologies for sharing it with 

you in that way. No bank—and Mr. Andrews probably knows this 

as well as anyone—will extend a loan unless it knows where it is 

going to get the funding and the liquidity. 

And so, for every single loan that is made, a mortgage loan, a 

credit card loan, a student loan, an auto loan, for every loan, there 

has to be a place where the bank can turn the other way and get 

funding. That can come from deposits. 

It can come from securitization. It can come from the GSEs. It 

can come from other sources. But ultimately what we are doing 

with this legislation and what the Covered Bond Council has supported is another tool in that toolbox for banks to turn around and 

pull liquidity out of the capital markets and turn around and make 

cost-effective loans to borrowers. 

Mr. SKEET. Could I just add, though? We don’t regard this as the 

same means of financing mortgages in Europe. It is only a part of 

what we do. 

Mrs. MALONEY. Could I also comment on the fact that the bill 

goes into great detail in how the covered bonds are treated when 

a bank fails, a large portion of the bill. And since the current pool 

is held on the bank balance sheet, could you talk about how the 

regulators would work to ensure that the covered bonds are successful as possible? Could you speak on the regulation of and how 

you see it? I think that is a big part of the bill. 

Mr. STENGEL. I think a key portion of this legislation is that covered bonds are issued by regulated financial institutions, so concerns about safety and soundness in issuance. No institution, under 

the proposed legislation, would be allowed to issue covered bonds 

without regulatory approval. So it would be a highly regulated 

product. 

What makes covered bonds different than ordinary secured debt 

is the limited risk of prepayment because the pool is managed rather than having a fire sale foreclosure of a large pool of loans. If you 

would go into the market with a billion dollars worth of mortgage 

loans that the buyers knew had to be sold within 90 days, you 

would get cents on the dollar. And that is basic economics. And so, 

what this legislation does is create a framework to manage that 

pool, continue making scheduled payments on the bonds if the pool 

will support it and maximize value and decrease losses. 

Mr. ANDREWS. If I could retort, to a degree? 

18 

Mrs. MALONEY. Yes. 

Mr. ANDREWS. What happens there is that those banks will not 

be holding those nonperforming assets on their balance sheet. 

What they will actually be doing is when the loan becomes nonperforming, they will pull that out of the pool. They will substitute a 

good loan that meets the underwriting criteria of the pool contract, 

and then they will fire sale that nonperforming asset. So I respectfully disagree to that point. 

Mrs. MALONEY. My time has expired. Thank you. 

Chairman GARRETT. Before I turn to the next questioner, who 

will be Mr. Schweikert, I would, without objection, enter into the 

record statements, just the statements with regard to this, from the 

OCC and the FDIC and statements in support of the legislation 

from the National Association of Realtors and the National Multi 

Housing Council. Without objection, it is so ordered. 

Mrs. MALONEY. Clarification—are the FDIC and the OCC supporting it or objecting? 

Chairman GARRETT. I don’t know. That is why I said the first 

two are the statements. 

Mrs. MALONEY. Okay. Just the statements, but not taking a position. 

Chairman GARRETT. They are couched in terms that they are in 

support of it, but they might not appreciate that. 

Mrs. MALONEY. Okay. 

Chairman GARRETT. The gentleman from Arizona, Mr. 

Schweikert, for 5 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

Mr. Stengel, just on the last point that was made, I noticed you 

sort of bounced up in your chair. Can you share what your thought 

was? 

Mr. STENGEL. Sure. I think Mr. Andrews was confusing what 

happens during the life of a bank, what happens with any loan on 

a bank’s balance sheet and then what happens to the cover pool if 

the bank were to go into insolvency. And so, certainly, during the 

life of a covered bond program, nonperforming loans are pulled out. 

They are kept on the bank’s balance sheet so they can be worked 

out. 

One of the advantages is this is 100 percent ‘‘skin in the game’’ 

for banks. But the resolution process that I was discussing was 

talking about what happens if the issuer were to enter into receivership. If that pool then, instead of being liquidated, billions of dollars worth of loans liquidated at a single moment, it instead managed and collections brought in and its value maximized. 

Mr. SCHWEIKERT. Okay. Mr. Chairman, Mr. Stengel, actually, 

walk me through a mechanic like what we have suffered through 

the last couple of years. My real estate market goes to hell in a 

handbag. I have institutions in your community that are participants. What happens to the unwind? 

Mr. STENGEL. I think what you will see in that process, again, 

if an individual bank were to fail, so if banks aren’t failing, banks 

are working with their borrowers directly. Again, you don’t have 

loans that have been securitized. Banks are working with their borrowers directly to manage those defaults on the individual loans. 

19 

If a bank that had issued covered bonds were to fail, the loans 

on its books in the normal receivership process, the bank would be 

put into receivership. The FDIC has to do something with that pool 

of loans on the bank’s balance sheet. Normally, those are going to 

be sold. 

They are going to be sold to another institution. They are going 

to be liquidated in the market. Again, they are pledged as collateral for the benefit of bondholders. What this legislation does differently is instead of having to force a fire sale, a liquidation sale 

of those loans pledged as collateral, instead they are managed so 

that there is value realized, not only by the bondholders, but also 

the residual ownership interest that is retained by receivership for 

the benefit of other creditors. 

Mr. SCHWEIKERT. All right. 

Mr. ANDREWS. Can I respond as well and give you the scenarios 

you are asking for? 

Mr. SCHWEIKERT. Sure. 

Mr. ANDREWS. Okay. So you have this credit-quality bond covered pool. During that meltdown, collateral values plummet across 

the Nation. Loans go bad. So what they do by contract in that covered pool is they pull those bad loans out. They put in their good 

ones. 

When the receiver, the FDIC, comes in, they only have the poor 

assets. The investor doesn’t get stung. It is the Deposit Insurance 

Fund that gets stung and all the players that play into that Deposit Insurance Fund. And so, what you have heard from the capital markets is the investors— 

Mr. SCHWEIKERT. Help me with one thing, because didn’t you, a 

moment ago, walk me through that you would be doing that swap 

and you would be liquidating the nonperforming assets? 

Mr. ANDREWS. That is just what I said. So earlier when you have 

a pool which is pristine and it starts to go bad because the economy 

has tanked, that pool needs to be overcollateralized and remain 

pristine. So they swap out the nonperforming asset, and they put 

in a good one. Where does that nonperforming asset go? It goes on 

the balance sheet of the bank, and they start getting a pile upon 

pile of nonperforming assets. 

Mr. SCHWEIKERT. That means you are liquidating those assets— 

Mr. ANDREWS. Then they have to liquidate them. And they fire 

sale them. Or if it is so great, like a WaMu situation, the FDIC 

comes in and asks, ‘‘What do we have here?’’ Well, we have a bunch 

of junk. 

Mr. SCHWEIKERT. Mr. Chairman, and forgive me, but the other 

alternative is even more devastating. If you are in that market upheaval, at some point then, do you have the taxpayers step in? Do 

you also, it also brings down the institution. 

Mr. ANDREWS. The taxpayers step in. And there are potential for 

those things. Who comes out a winner here is Wall Street and the 

investor. 

Mr. SCHWEIKERT. And, in many ways, forgive me for cutting in, 

but you also have the taxpayers being the loser in that scenario. 

And I know I am running out of time, but one mechanic. Okay, let 

us say the loans have been bundled and securitized. Walk me 

through the same scenario where— 

20 

Mr. ELY. If I could address that point, you can probably see that 

the securitization market today is tremendously trying to work out 

and modify mortgages. This is an issue before you all the time because there are so many different players involved in protecting 

their interests. 

The thing with covered bonds is that the bank that made the 

loan still has it. If the mortgagee is in trouble, it moves out of the 

cover pool, but it still is on the bank’s balance sheet. That leaves 

the bank without any competing and conflicting interests, who then 

has to modify the loan. 

I disagree with Mr. Andrews that these problem loans would lead 

to a fire sale. The bank is going to, like any other problem loan it 

has on its books, try to work that out to minimize its loss. 

And I would suggest that in the current banking environment 

where the bank still has 100 percent of the loan, it is going to be 

a much easier and more straightforward process to resolve that 

loan problem. That is not the case when mortgages are securitized. 

Mr. SCHWEIKERT. Thank you. 

Mr. Chairman, I know I am out of time. But I would love someone to address what happens when the bank doesn’t still retain 100 

percent of the loan—and hopefully someone else on the panel will 

ask that. There you go. 

Mrs. MALONEY. They are required to, aren’t they? 

Chairman GARRETT. I will yield now to Mr. Campbell for 5 minutes. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

And if you indulge me, I am going to go to covered bonds kindergarten here. And I am going to use Mr. Andrews because you are 

here. So prior to 2008, Mr. Andrews makes 30-year, fixed-rate 

home loans. And he can either retain them in the old model of the 

1970s and so forth, or he sells them off and, to a collateral pool, 

is what happened prior to that. 

Okay, so now we have this covered bond alternative. So he sells 

that loan and covered bond. The cover is the pool of the loans, his 

and other banks, presumably. And, when I am wrong, I will give 

you an opportunity to tell me I am wrong. But, all right, then, if 

that is not the cover, what is the cover? 

Mr. ELY. What is in the cover pool are the assets that are securing the bonds. Those assets are loans that are on that bank’s balance sheet. There is not a pooling of the loans. 

Mr. CAMPBELL. Okay. The bank owns the loans, and it issues 

covered bonds. Then he does that for his liquidity and so forth out 

there? But the only thing covering that is the same loans that 

would have covered it had it been sold into a CMBF in the mortgage-backed securities market of some sort. Right? There is no additional collateral? 

Mr. ELY. May I offer a distinction? 

Mr. ANDREWS. You could substitute loans if they go bad. 

Mr. CAMPBELL. Okay. 

Mr. ANDREWS. So we could sit here on our balance sheet and pull 

out this one and pull up that one. And that is exactly what WaMu 

is doing. 

Mr. CAMPBELL. So why do you do that? Why would you go to a 

covered bond? And then I will come back to you on that one. Why 

21 

would you go to a covered bond market if there were a mortgagebacked securities market available? 

Mr. ANDREWS. We personally wouldn’t. We could hold 30-year 

mortgages on our books today all day long. If we were worried 

about interest rate risk, say, we are making loans today at 4 percent— 

Mr. CAMPBELL. Let us say you couldn’t. 

Mr. ANDREWS. —we would get an interest rate swap. 

Mr. CAMPBELL. Let us say you couldn’t. Let us say you could go 

on, either, you needed liquidity, so, on these things. So you either 

went to mortgage-backed security or a covered bond market? 

Mr. ANDREWS. Or the Federal Home Loan Bank. 

Mr. CAMPBELL. Okay. 

Mr. SKEET. Can I just interject? The U.K. banks, Mr. Chairman, 

they look at both instruments. And they want to have access to 

both instruments. This is not either/or. This is not an exclusive. All 

we are talking about is an additional instrument for which you 

have investors in the United States. It is in addition to what you 

have already have. 

And I think the U.K. banks in particular want access to the old 

ABS market. They think it is a good market. However, they use 

covered bonds because it is actually cheaper. This is a better, costeffective, longer-term source of funding for them. And it is important liquidity. Lack of liquidity had been killing our banks. 

Mr. CAMPBELL. Okay. 

Mr. SKEET. This is a good way to get term liquidity back. 

Mr. CAMPBELL. Mr. Daloisio? 

Mr. DALOISIO. Congressman Campbell, thank you. The distinction I would like to offer for the subcommittee, between what Mr. 

Andrews offers, which is a hypothetical, and what we have experienced, is this. The assertion is that the economy goes bad, and as 

a result, the loans go bad. That is really not the cause-effect relationship that we just experienced in the prior crisis. 

The cause-effect relationship we experienced in the prior crisis 

was the underwriting went bad, the loans went bad, and the economy went bad. The underwriting went bad because there was an 

ability to transfer risk without a proper disciplined market mechanism for the supervision of that risk for a number of reasons we 

don’t need to get into. 

If banks had the incentive to ensure that the risk that was being 

retained in the whole loans that they have on their balance sheet 

was no different than any other risk that they are managing in 

those mortgage loans, there could not be that cause-effect relationship. So we would have had—if we had a covered bond paradigm, 

it is my opinion that we may very well have created the situation 

where the underwriting discipline was reinforced because the 

banks continued to own that risk and, therefore, the loans did not 

go delinquent, and therefore, the economy did not go south. 

Mr. CAMPBELL. Okay. Let me ask this, then. My concern, going 

forward, is that, and to Mr. Andrews’ point, we will have 69 percent homeownership, probably 65 or 66, whatever we are now. And 

the banks get excited about certain segments of the loan market 

for a while, and they will lend to anybody. And then they pull back. 

22 

They do that in home loans. They do it in car loans. They do that 

in commercial loans. They do in all kinds of segments. 

And we can’t let the entire home market be subject to the fact 

that you are right about the concentration of banking now. That 

large banks, it is true we don’t like home loans for the next 3 

months, so we pull back and tank the whole economy along with 

it because people can’t sell homes and the liquidity, etc. 

I am not sure I see where this solves that problem, where this 

creates any—it provides a new option. But I am not sure it provides a lot of stability when the banking sector decides to pull back 

from a particular market. 

Mr. DALOISIO. If I could just add, I am not sure why a bank 

would pull back from a market. 

Mr. ANDREWS. They do it all the time. Because their delinquencies go up. And they decide this is a bad place to be and then 

the bank down the street sees that they have pulled out and they 

do it all the time. 

Mr. STENGEL. I guess I would propose that the banks are pulling 

back—to be said that they are pulling back in home loans today, 

that is because they don’t have liquidity on the back end to fund 

the new loans that are been made. The Basel III proposals are requiring banks to hold an enormous amount of liquid assets on their 

balance sheet. 

There are many factors at play right now that are going into reduced lending. And I think one of those factors is a lack of liquidity, a lack of funding for banks where they feel comfortable they 

have long-term funding and they can turn around and make a 

long-term loan. The last thing we want is banks making bigger 

loans based on 90-day short-term funding. That is the volatility we 

ran into in the crisis. 

Mr. CAMPBELL. My time has expired. But trust me, they will go 

completely out of an entire segment, large— 

Mr. SKEET. If they don’t have the money, they can’t— 

Mr. CAMPBELL. —completely out of an entire segment of the 

economy for a while. 

Chairman GARRETT. If the gentleman is ready, I will yield to Mr. 

Carson. 

Mr. CARSON. Thank you, Mr. Chairman. 

This question is for Mr. Tim Skeet on behalf of the International 

Capital Market Association. Much has been made of the performance of European covered bond markets during the initial stages of 

the global financial crisis of 2008 to 2009. How much of that success can be attributed to the fact that in most cases, those administering the European covered bond pools were prohibited from 

buying U.S. ministered assets, which really act as the original 

source of financial contagion? 

Mr. SKEET. Obviously, we did suffer in Europe from European institutions buying U.S. products. If you take a look at certain parts 

of the European market, I think it was clear that many European 

investors bought products that they simply didn’t understand, and 

where they hadn’t done due diligence correctly. 

We do have an opportunity here with this new product, the covered bonds from the United States, whereby investors who are 

doing a lot more of their homework would be able once again to 

23 

buy American assets, but feel happy about it and feel safe about 

it. So I think we have European investors who want to buy U.S. 

mortgage-backed products, even though if it is ABS, they probably 

would be unhappy, they will look at this when it is created. I don’t 

know whether that answers your question, but— 

Mr. CARSON. I yield back. 

Chairman GARRETT. To the gentleman from New York, Mr. 

Grimm. Thank you. 

Mr. GRIMM. Thank you, Mr. Chairman. 

I guess for me, the heart of the debate lies with the disparity 

somewhat between the facts, as Mr. Andrews states them in the 

passion—and I appreciate that, and, again, it is four to one. So I 

am been there myself many times. 

All right. 

Mr. Andrews, why do you see that the community banks will not 

have access and be squeezed out? And we are hearing that the 

pools will be available. I am not so sure. I think on that one part, 

I probably tend to lean towards your concern that something tells 

me that— 

Mr. ANDREWS. You should. 

Mr. GRIMM. —the intentions are going to be great that community banks will have complete access, but when the rubber meets 

the road, they might not. So if you can expound on that for a second. 

Mr. ANDREWS. Okay, certainly. Community banks have access 

right now to the Federal Home Loan Bank for this very purpose. 

They are an aggregator of sorts for us to have liquidity, to make 

these loans and transactions. What I foresee in the covered bond 

market as it develops, it will all migrate to the big deal flows, the 

big four banks. 

I think what we have today is we have a huge hangover from 

systemic risk and ‘‘too-big-to-fail.’’ And what we are doing is we are 

pushing this train of Freddie and Fannie and all these players, all 

the volume they had, those trillions of dollars we are talking about, 

right onto the balance sheets of the largest banks. They are going 

to out-price the little guys, and they won’t be able to compete. And 

that, to me, is a bunch of issues. 

Mr. GRIMM. But this would not replace the Federal Home Loan 

Bank. That would still exist. That option would still be there for 

the community banks, but not— 

Mr. ANDREWS. I am not saying it would replace it, as long as 

Congress continues to charter it. But there will be an issue in a 

sense that the big banks will back away. They will back away from 

using the Federal Home Loan Bank because now they have their 

own conduits. And believe me, they provide revenue sources to the 

Federal Home Loan Bank. And that will increase the advanced 

pricing that we enjoy as a community bank. 

And we don’t have the same ability to access capital markets, 

being a small player, either for liquidity or for capital. 

Mr. GRIMM. If I may, I will let Mr. Ely respond to that, as far 

as the Federal—Mr. Andrews’ legitimate concern with the Federal 

Home Loan Bank and the bigger players no longer being involved 

because they are all on the covered bond market. 

24 

Mr. ELY. There may be some pull-back but it is interesting that 

in the White Paper that the Administration presented on GSE reform, they proposed putting limits on the ability of the Federal 

Home Loan Banks to lend large amounts of money to large institutions. 

But even so, first of all, the Federal Home Loan Bank balance 

sheets have shrunk a lot as advances have been paid down. Federal 

Home Loan Bank operations and their wholesale business, the way 

it is going, they will be able to continue to operate very efficiently 

and serve the smaller community banks very efficiently because 

their operating expenses are so low as it is. So I don’t think that 

you would see a situation where the cost of Federal Home Loan 

Bank advances to community banks would rise in a meaningful 

way. 

But again, it is important to stress the pooling provision in the 

covered bond bill and the experience in Europe. In fact, smaller depository institutions, smaller lenders can, in fact, participate in the 

covered bond market. Thank you. 

Mr. SKEET. Yes, if I could just reinforce that. We do have smaller 

banks use this market. This market is not simply for very, very 

large, jumbo-type transactions. Increasingly, the market is flexible. 

They are much smaller sized transactions being brought to the covered bond market in Europe by much smaller financial institutions. 

Mr. GRIMM. Time is running out. If I could, Mr. Stengel, why is 

the FDIC opposed to creating a covered bond regulatory framework? Because I still don’t know why they are opposed to it. If you 

could explain. 

Mr. STENGEL. Sure. I really do think it is an institutional bias. 

If I were the Chairman of the FDIC sitting before you now, I would 

be concerned about wanting to control all aspects of a resolution of 

a bank. So I wouldn’t like securitization. I wouldn’t like Federal 

Home Loan Bank lending and their priority status. I wouldn’t like 

any repo funding. And I wouldn’t like any secured credit at all. 

And I think it is largely driven by an institutional bias with a 

focus on the risk to the Deposit Insurance Fund. And again, that 

is natural. It is understandable. But I think, again, it is my— 

Mr. GRIMM. Is it legitimate? 

Mr. STENGEL. It is myopic. It fails to recognize that what we 

need is long-term, stable liquidity for banks so they don’t end up 

in the FDIC’s lap in the first place. 

Mr. ELY. If I could add to that, I think the FDIC is not making 

a proper evaluation of the risk covered bonds pose to the Deposit 

Insurance Fund, particularly in light of the Dodd-Frank change in 

the FDIC assessment base, which is going to bring an enormous 

amount of revenue into the Deposit Insurance Fund from assets 

that are funded by covered bonds. 

Mr. CAMPBELL. Mr. Chairman, since the FDIC is not here, you 

might want to read the first two sentences of their conclusion that 

clarifies where they are. 

Chairman GARRETT. I will yield 15 seconds to the gentleman 

from California to do that. In the completion of that, I will yield, 

without objection, an additional 15 seconds to the co-sponsor of the 

legislation to follow-up on the question that the gentleman from 

New York raised with regard to the pooling issue. 

25 

Mr. CAMPBELL. ‘‘The FDIC supports a vibrant covered bond market that would increase liquidity of financial institutions and enables sustainable and robust asset organization. However, any legislation should avoid promoting development of a covered bond 

market that provides bipolar risk to covered bond investors and 

give rights to investors that are superior to that of any other secured’’—I just thought that their position should be put in their 

words. 

Chairman GARRETT. Mr. Grimm, any— 

Mr. GRIMM. I yield back. 

Chairman GARRETT. Okay. 

The gentlelady from New York? 

Mrs. MALONEY. Thank you, Mr. Chairman. 

I would like to ask Mr. Andrews, certainly, the purpose we have 

is to provide liquidity for those Americans, community banks and 

banks. And I would like you to respond to the statement made by 

many that the pooling aspect of the bill would allow community 

banks to be—in response to Mr. Ely’s question on Home Loan 

Banks—on what they could do. 

And what are the limits on this, in terms of how large these covered pools can be? Are there any limits upon it? But Mr. Ely’s— 

pooling aspect—why is that such a—community banks be part of 

this new— 

Mr. ANDREWS. When you talk about capital markets, capital markets are interested in big players with big deal flow. For instance, 

today a small community bank could go out and access the capital 

markets to a degree to bring in capital. And it couldn’t go out and 

access to bring in debt as well. And that is what we are really talking about here, is bringing in more debt financing in lieu of deposits funding the same way that Wall Street did. 

And so, I think it is a little bit academic in the sense you are 

saying, you can all—you good little banks can get together and pool 

and do this. Maybe that can happen, maybe it won’t. But I think 

practically what is going to happen is all this business will end up 

on the books of the large banks. And they will price out the little 

guys. You see that in every industry. 

Community banks do have access to liquidity through the Federal Home Loan Bank. But it is difficult for them to tap capital 

markets because they are not significant enough in size. And the 

argument being made here is, we will let all these little guys pool 

together, and once they pool together, they can price as competitively as we do. And I say, no, that is not going to be the case. 

Mr. STENGEL. Could I offer just very quickly? I would just—2 seconds on the Federal Home Loan Banks. The distinction between 

the Federal Home Loan Bank funding and covered bonds really 

falls into two categories. One is the breadth of the asset classes. 

U.S. covered bonds can fund a much broader range of asset classes. 

They can also fund a maturities with the Federal Home Loan 

Banks offer—don’t offer. 

And if I can remind the members, and this shouldn’t be lost, the 

Federal Home Loan Banks are GSEs with an implicit Federal subsidy. We have every implicit subsidy that Fannie Mae has and 

Freddie Mac has. So, of course, they can provide more economical 

pricing for the community banks. And that is not necessarily bad. 

26 

But let us not forget that the Federal Home Loan Banks are not 

GSEs. 

And if I could— 

Chairman GARRETT. Let me try to get back to regular order here. 

We can do another round, I guess. 

To the gentleman from New Mexico, Mr. Pearce? 

Mr. PEARCE. Thank you, Mr. Chairman. 

Mr. Andrews, Mr. Ely points out that loans on the books was one 

of the problems. In other words, the issuing institutions really 

didn’t have much stake in seeing that the loan performed. Is that 

something that you see as a problem, or is that something you 

don’t object to, keeping a loan somewhat on your books? 

Mr. ANDREWS. Community banks do carry mortgage loans on 

their books. And if they get concerned about interest rate risk, they 

can always do an interest rate risk swap. 

Mr. PEARCE. So it is not a concern? 

Mr. ANDREWS. Or they can use Federal Home Loan Bank to—no, 

it is not a concern, other than having the additional capital. 

Mr. PEARCE. Right. Okay. 

Mr. ANDREWS. And so, it is easier for banks to sell it and get a 

fee than provide more capital. 

Mr. PEARCE. Yes. Right. I just wanted to clarify that. 

And, Mr. Stengel, you mentioned that we really didn’t have anything to worry about, that the market would come from—on the 

covered bonds would come from—or be issued by regulated institutions, highly-regulated institutions. Didn’t all the collateralized 

debt obligations in the MBS—didn’t those originate in highly-regulated institutions? Just yes or no. 

Mr. STENGEL. No, sir. I would say most of them— 

Mr. PEARCE. They did not? 

Mr. STENGEL. —originated with institutions that are not necessarily as highly regulated as insured depository institutions. 

Mr. PEARCE. Okay. All right. I find that curious. 

Mr. Daloisio, that is kind of hard to say with a West Texas accent. 

[laughter] 

You said that in the process of the transferred risk the underwriting went bad, and then the economy went bad. Now, somewhere in there, the underwriting, the market just assumed the underwriters were not even going to look, that the truth was we had 

an entire bonds issued with no performing loans anywhere in them. 

That is the reason that four or five institutions made a bunch of 

money selling short. 

And so, it appears that it is far more complex than just the 

transfer of risk, the underwriting went bad, and the economy went 

bad. It looked like an organized, a disorganized structure that simply never checked itself, that bad loans were made with never the 

potential of paying back. In 2 years, you are going to sell that 

house, and you don’t really have to make any initial payments, no 

principal, no interest. 

And so, to say that simply a transfer of risk was, or the originating thing, I would include as a hunger in the market for these 

instruments that allowed tremendous profits to be made as long as 

the game was going up. And then when the game went the other 

27 

way, we tagged the taxpayer with the downside. And so, you stand 

by your statement that it was simple process, transfer of risk, underwriting went bad, the economy went bad? 

Mr. DALOISIO. I do believe it is that simple because I do think 

the incentives to relax the underwriting standards were enabled by 

the ability to more readily transfer the risk into a capital market 

system, which started to operate on, more so on the basis of what 

seemed to be an ever-increasing rise in home prices and an everlengthening favorable past historical experience. 

Mr. PEARCE. Okay. I will accept that. 

Mr. Stengel, you have mentioned that there is no liquidity, that 

the lack of liquidity, the lack of funding. And I find just the opposite. I find the local community bankers tell me that they have 

quite a bit of money to lend. 

Because, number one, if they make one bad loan, they stand to 

lose their entire institution. And, number two, now the compliance 

reviews are more rigorous than the safety and soundness reviews 

and that things that used to be simple exceptions are now written 

up as $50,000 fines. And they are saying, why in the world would 

we do a home loan when one small thing on a flood insurance program, which, one, collected flood insurance—we started 3,000 feet 

above sea level and we go higher than that. 

And so, down on the coast—and yet, one bad statement in there is a $50,000 fine. They are saying, why should we, why should we 

bear the risk. What do you base your statement on that small 

banks have no liquidity? 

Mr. STENGEL. On your comments about the regulatory exams, 

that may well be the case. And so, I think your concerns may well 

be founded and, certainly, worth investigating. On the question 

about liquidity, the liquidity that exists today are all deposits 

where people have put into banks because they are afraid of investing their money elsewhere because the economic recovery has been 

fragile. 

And I think what you are going to see is when the economy 

turns, the deposits are going to get yanked out as people look for 

better yields. So today, I think there is probably plenty of liquidity. 

I suspect the banks have deposits they don’t want because they 

can’t make any money with them and that when the economy 

turns, we are going to need these tools, we are going to need 

securitization. And we are going to need all of those tools to keep 

our economy growing. 

Mr. PEARCE. And do you think the policy of paying interest on 

these areas is maybe contributing, in other words, just the banks 

can borrow at, more or less and get 2 percent, is that maybe contributing also, you have more risk guarantees? 

Mr. STENGEL. I would be reticent to comment about— 

Mr. PEARCE. Okay. 

Mr. GRIMM. Can we just thank Mr. Pearce for those in the coastal regions with the Fed problems? We do appreciate that. 

[laughter] 

Chairman GARRETT. Thank you. 

Mr. Stivers for 5 minutes, please. 

Mr. STIVERS. Thank you, Mr. Chairman. And I want to kind of 

go a little backward and back to the beginning of why we are here. 

28 

We are here because the GSEs, thankfully, helped fuel the crisis 

that we are in. And now a lot of folks in Washington are saying, 

gee, should we have an implicit government guarantee through the 

GSEs, should we look for a different model? So one of the reasons 

that we are here is because covered bonds are a different model. 

And I know Mr. Skeet talked earlier and said that you don’t 

think covered bonds are the only solution. What kind of capacity 

could the covered, could a buyer-covered bond market create? 

Would it create enough of a capacity to replace what the GSEs are 

doing today? And we can start with Mr. Skeet. 

If anybody else wants to comment— 

Mr. SKEET. Just very briefly, no, we don’t think it will replace 

the GSEs. It is an additional tool. It is a logical tool. It is a tool 

that makes sense. 

Remember that, again, you asked earlier about limits, whether 

or not you can issue. The U.K. guidance is about 20 percent of total 

assets. You can do a quick calculation. That is the upper limit that 

the regulator in the United Kingdom feels comfortable with the 

bank issuing. Beyond that, they will stop you or up the amount of 

capital you need to hold. 

You do the calculation. That is a good capacity. You can do a lot 

of term funding. But remember, the Net Stable Funding Ratio is 

an important ratio for all financial institutions here on after because regulators care about, not just deposits and the amount of 

deposits, but do you have 5- and 10- and 15- and 20-year money 

out there. That is part of keeping banks safe and sound for the future. 

Mr. ELY. If I could just add to that, Mr. Stivers. The U.S. resi- dential mortgage market for owner-occupied housing is now $10 

trillion outstanding. A covered bond market would develop because 

investors would get used to it, what you put out there. It is conceivable that the covered bond market might grow to 5 or 10 percent 

of that. 

Then let us say you owe $500 billion or $1 trillion of paper. That 

is still small, even in the European market. But it would be a very 

significant market, a highly liquid market and covered bonds become an important, not the sole source, but an important source of 

funding for home mortgages, particularly as Fannie and Freddie 

shrink and more specifically, as their balance sheets shrink. 

Mr. STIVERS. Thank you. I think you pretty much agree. And I 

know it is an important tool. But we all need to understand we 

have a lot more work to do. And maybe Mr. Skeet is right and it 

is 20 percent. So it is $2 trillion. But it is not going to fix it completely. But it is a good tool, I think. 

I do have a question about the overcollateralization. So essentially, the 20 percent rule is basically how they, how the European 

market manages that. You have 100 percent of loans to cover the 

20, whatever, 100 percent of the loans you haven’t securitized to 

cover the 20 percent of loans you allowed to issue covered bonds 

against. Is that essentially correct? 

Mr. SKEET. It is getting quite complicated because of the way 

this Net Stable Funding Ratio has been introduced. Because if you 

look at that, the overcollateralization portion of a covered bond has 

to be 100 percent funded from the senior unsecured market, whereVerDate Nov 24 2008 16:44 May 13, 2011 Jkt 065675 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\65675.TXT TERRIE
29 

as the mortgages themselves outside the pool have to be funded 65 

percent. So there are various calculations that need to be done. 

The world will become a lot more complicated in the future. But, 

of course, I think it will become a safer and more stable place if 

we are allowed to do that. 

By the way, the FSA is a little bit vague about how it monitors 

the collateralization levels. It is specifically the U.K. that has done 

the most work on this. What they are monitoring on an ongoing 

basis is the overall level of the collateral that is in the pools 

against the covered bonds. If it gets beyond a certain level, they get 

uncomfortable and they will increase the capital charge for those 

banks. 

So it is not a file and forget. This is constant monitoring. It is 

proper supervision. 

Mr. STIVERS. Great. Mr. Andrews brings up some good points. 

And Mr. Skeet talked about, I think you talked about in Norway, 

how some smaller banks have come together. But I believe you said 

they came together under a larger bank who, it was on the larger 

bank’s balance sheet. 

Mr. SKEET. They created a third-party bank, if you like, which 

specifically took the— 

Mr. STIVERS. Okay. 

Mr. SKEET. —assets from there. 

Mr. STIVERS. As a conduit. 

Mr. SKEET. It was a properly constituted bank. But it was set up 

for the sole purposes of taking in the assets of these lesser institutions. 

Mr. STIVERS. —finance. 

Mr. SKEET. —of the financing and then issuing. And they issued 

in the United States market, interestingly enough. 

Mr. STIVERS. Great. That was the only other question I had. 

Thank you. I yield back the balance of my time, Mr. Chairman. 

Chairman GARRETT. And I thank you for your questions, sir. 

If the panel is still ready, we are going to—we have just noticed 

that we are going to have votes called. We have many members 

who have not had an opportunity to ask questions, so if you are 

ready, we are going to switch into lightning round here. Each member will be allowed 1 minute of questions and quick answers. And 

then by that time or during that time, we may actually be called 

to votes. But I will say thank you to the panel right now. 

So just very quickly on a couple of points, I entered into the 

record earlier today the FDIC’s comments and statements with regard to this. They propose significant changes. And I guess the 

question on that is if they were to be adopted, what would happen 

with regard to the investor interests of purchasing these? 

Mr. STENGEL. There would be no market. 

Mr. SKEET. I agree with that. There would be no market. 

Chairman GARRETT. Okay. You can say a little more than that. 

[laughter] 

Mr. SKEET. Let me just say that investors need certainty. What 

the FDIC proposed does not give certainty. In Europe, as in the 

United States, I believe that many of the investors will be highly 

concerned about the nature of the instrument and their rights 

thereunder. 

30 

Chairman GARRETT. Okay, 26 seconds. There we go. So in the 

pooling arrangement in the European model where you have—the 

last question just came. What is the responsibility there for the 

member banks to that created bank? Do they have an obligation, 

as Mr. Andrews properly raised, to go back to those member banks 

and to say, you have to repool, take out— 

Mr. SKEET. Yes, they do. And they have to put capital in and 

contribute capital as— 

Chairman GARRETT. That central bank, I will call it, if that bank 

fails, can you, do you still have the liability back to those individual banks? 

Mr. SKEET. Yes, you will do. 

Chairman GARRETT. Okay, thank you very much. 

Mr. CARSON. Thank you, Mr. Chairman. 

This question is for Mr. Daloisio. Some have suggested that the 

covered bond market should replace the mortgage-backed 

securitization model for financing home loans. If this were to happen, sir, would you recommend the GSEs like Fannie and Freddie? 

Mr. DALOISIO. In my professional opinion and as a citizen of this 

country, I think I would prefer to see governmental resources be 

used to stimulate markets that don’t exist as opposed to markets 

that could be operated properly by the private sector, which have 

existed for quite some time, particularly alternative energy I would 

use as an example. I think that would be a far more efficient use 

of the public resources. I think the public sector system for financing mortgages is fully replaceable by the private sector. 

Mr. CARSON. I yield back. 

Chairman GARRETT. Mr. Schweikert for 1 minute, please. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. Back to where I 

was trying to tap before, what happens, is there a model, in your 

mind, of the institution, let us say, our community bank, not retaining all the liability or not retaining mortgage or pumping them 

up into a securitization market? Tell me your vision on that flow 

working. 

Mr. ELY. That is the model for many community banks. They sell 

their 30-year, fixed-rate mortgages to Fannie or Freddie or, if they 

are jumbos, they try to securitize those jumbos. The key thing 

about covered bonds is that a mortgage doesn’t get sold. The lender 

keeps it. So instead of moving the mortgage to the source of funds, 

you are bringing the funds to the lender and leaving the loan and 

the covered bond funding on the lender’s balance sheet. 

Mr. SCHWEIKERT. Mr. Chairman, I am probably almost out of 

time. Any method you see within there to provide that enhanced 

liquidity of having a securitization participation, such a thing? Or 

is it, do they just need to stay completely separate? These are different ways of funding mortgages. So if there has ever been sort 

of a model or a discussion of a sort of a bifurcation. 

Mr. ELY. I am not aware of it. 

Mr. SCHWEIKERT. Okay. 

Thank you, Mr. Chairman. 

Chairman GARRETT. The gentlelady from New York. 

Mrs. MALONEY. Given this covered bond, in Europe, how did they 

perform during the financial crisis and the credit crunch in 2007, 

and 2008 when bank balance sheets were under pressure? And I 

31 

do know that we have had previous hearings on it, but they did not 

perform well in the United States during the crisis. Any comments 

of why it didn’t perform in the United States and how it performed 

in—so we can get a sense of— 

Mr. SKEET. Very, very briefly, Mr. Chairman, in the paper that 

I submitted prior to this hearing, we set out how we learned a lot 

about what happened. And there are some statistics in there. Every 

single asset class, including, as we now know, sovereign assets, 

were hit by the crisis, that the most recent problems have been 

sovereign-related and not any specific instrument. 

Covered bonds probably were the least affected. Yes, they were 

effective. Yes, there was illiquidity. All of that is correct. It came 

out the fastest from this particular crisis. 

That is the important aspect. We have done very well in Europe, 

but we are not complacent. And that is why, precisely why, we are 

tightening up the rules, the transparency and the legislation, even 

though it is several hundred years old. 

Chairman GARRETT. Thank you. 

Mr. Campbell, for 1 minute. 

Mr. CAMPBELL. One of the causes of the financial collapse is a 

lot of people made a lot of money and transferred the risk onto 

other places, which ended up being the taxpayer. The FDIC is concerned that we are doing that here again with covered bonds. 

And Mr. Andrews’ scenario where there is this pool, and as 

things get bad, they get pulled into the bank, replaced with good 

loans, and then the bank finally has all the bad loans and goes 

down, the FDIC has to step in. But the covered bondholders are 

fine because they have all the good loans, and the bank has all the 

bad loans. Why is that not a concern? 

Mr. STENGEL. I would just make two points. The first is when 

you talk about the DIF, let us remember who funds it. The taxpayers who fund it are the banks. The top 10 banks from 43 percent; the next 100, 39 percent. 

Mr. CAMPBELL. I get that. But the scenario I just described can 

occur. 

Mr. STENGEL. It can. And the banks are paying insurance premiums right now to cover it for post, the after-crisis and before. So 

the banks are self-insuring against that risk. 

Mr. ELY. Mr. Campbell, I have done some financial modeling on 

this in terms of what the risk is to the FDIC. I would be glad to 

submit that analysis for the record. But basically, the additional 

loss that the FDIC would experience as the deposit insurer would 

really be quite modest, especially related to the premium income on 

covered bonds as of April 1st. 

Chairman GARRETT. Thank you. 

Mr. Pearce, for the last word? 

Mr. PEARCE. I would like to wrap up with Mr. Ely. 

Mr. Skeet, I don’t mean to overlook you and ignore you, but I 

represent New Mexico, which has a lot of Hispanic descendants. 

And that whole thing with the Spanish Armada still hasn’t quite 

settled out yet. 

[laughter] 

Mr. SKEET. The Armada—I think we won that battle. 

Mr. PEARCE. Okay. We will look for it. 

32 

Mr. SKEET. That is done and gone. 

Mr. PEARCE. Mr. Ely, Mr. Andrews expressed that all the money 

is going to migrate to the big deals. And I worry about that, too, 

that the further away the institutions get from New Mexico, the 

rates of return on their investments in New Mexico look microscopic. We don’t have high-priced properties. And we don’t have 

high-priced anything. So can you give the assurance to Mr. Andrews and myself that won’t happen? 

Mr. ELY. Yes, I will certainly try. 

Mr. PEARCE. Instead of— 

Mr. ELY. The key thing is that community banks can participate 

in the covered-bond marketplace. And they will be able to do so. 

As Mr. Skeet has indicated, there is history in Europe to that effect. I see no reason why that wouldn’t be the case in this country. 

In many ways, I think covered bonds will actually strengthen 

community banking because community banks will be better positioned than they are today to not just make these mortgages, but 

to keep them and maintain the customer relationship and not just 

sell the mortgage, but as they also do many times they sell the 

servicing rights. So there is a complete detachment of the customer, the borrower, if you will, from the bank. 

What covered bond funding will do is allow for the preservation 

of that customer relationship. And I would argue that one of the 

benefits of covered bonds will be to actually strengthen community 

banking in this country by enabling banks to hang onto loans rather than feel compelled to sell them because it is not necessarily a 

piece of cake today to go out and assume interest rate risk on a 

30-year, fixed-rate mortgage, which is why most community banks 

sell off all their 30-years. 

Mr. PEARCE. Mr. Andrews, do you want to wrap up? I am out of 

time. Thanks. 

Chairman GARRETT. I thank you. 

And I thank all the members of the panel. I very much appreciate all of you coming here today and your testimony and your 

views. 

Without objection—and it doesn’t look like there will be any objection—the hearing record will remain open for 30 days for members to submit questions to these witnesses and to place their responses into the record. And with that, this hearing is adjourned. 

Thank you very much. 

[Whereupon, at 11:41 a.m., the hearing was adjourned.] 

(33) 

A P P E N D I X 

March 11, 2011 

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