[Federal Register Volume 73, Number 79 (Wednesday, April 23, 2008)]
[Notices]
[Pages 21949-21953]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-8750]


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FEDERAL DEPOSIT INSURANCE CORPORATION


Covered Bond Policy Statement

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Interim final statement of policy.

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SUMMARY: The Federal Deposit Insurance Corporation (the FDIC) is 
publishing for comment an interim final policy statement (``Policy 
Statement'') on the treatment of covered bonds in a conservatorship or 
receivership. The Policy Statement provides guidance on the 
availability of expedited access to collateral pledged for certain 
covered bonds in a receivership or a conservatorship, after the FDIC 
decides whether to terminate or continue the transaction. The Policy 
Statement provides guidance to facilitate the prudent and incremental 
development of the U.S. covered bond market while the FDIC, and other 
regulators, evaluate

[[Page 21950]]

the benefits and risks of these products in the U.S. mortgage market. 
The Policy Statement is being published as ``interim final'' in order 
to provide immediate guidance, but with a view to possible later 
amendment in response to comments received.

DATES: Effective April 23, 2008. Comments must be submitted on or 
before June 23, 2008.

ADDRESSES: You may submit comments by any of the following methods:
     Agency Web Site: http:// www.fdic.gov/regulations/laws/federal.
    Follow instructions for submitting comments on the Agency Web Site.
     E-mail: [email protected]. Include ``Covered Bond Policy'' 
in the subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Instructions: All comments received will be posted 
generally without change to http://www.fdic.gov/regulations/laws/federal/propose.html, including any personal information provided. 
Comments may be inspected at the FDIC Public Information Center, Room 
E-1022, 3502 North Fairfax Drive, Arlington, VA 22226, between 9 a.m. 
and 5 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Richard T. Aboussie, Associate General 
Counsel, Legal Division (703) 562-2452; Michael H. Krimminger, Special 
Advisor for Policy (202) 898-8950.

SUPPLEMENTARY INFORMATION:

I. Background

    The FDIC has received questions from interested parties about how 
covered bond transactions will be treated in a conservatorship or 
receivership of an insured depository institution (``IDI''). Currently, 
there are no statutory or regulatory prohibitions on the issuance of 
covered bonds by U.S. banks. Interested parties assert that if the FDIC 
were to issue a policy statement providing guidance on the availability 
of expedited access to collateral pledged for certain covered bonds in 
a conservatorship or a receivership, it would reduce market uncertainty 
and the additional costs of U.S. covered bond transactions. As 
discussed below, these costs are created by the additional liquidity 
needed to insure continued payment on outstanding bonds if the FDIC as 
conservator or receiver fails to make payment or provide access to the 
pledged collateral after the FDIC decides to terminate the covered bond 
transaction. The Policy Statement does not impose any new obligations 
on the FDIC, as conservator or receiver, but does define the 
circumstances and the specific covered bond transactions for which the 
FDIC will grant consent to access pledged covered bond collateral.
    Covered bonds are general obligation bonds of the issuing bank 
secured by a pledge of loans that remain on the bank's balance sheet. 
Covered bonds originated in Europe, where they are subject to extensive 
statutory and supervisory regulation designed to protect the interests 
of covered bond investors from the risks of insolvency of the issuing 
bank. By contrast, covered bonds are a relatively new innovation in the 
U.S. with only two issuers to date: Bank of America, N.A. and 
Washington Mutual. The initial U.S. covered bonds were issued in 
September 2006.
    In the covered bond transactions initiated in the U.S. to date, an 
IDI sells mortgage bonds, secured by mortgages, to a trust or similar 
entity (``special purpose vehicle'' or ``SPV''). The pledged mortgages 
remain on the IDI's balance sheet, securing the IDI's obligation to 
make payments on the debt, and the SPV sells covered bonds, secured by 
the mortgage bonds, to investors. In the event of a default by the IDI, 
the mortgage bond trustee takes possession of the pledged mortgages and 
continues to make payments to the SPV to service the covered bonds. 
Proponents argue that covered bonds provide new and additional sources 
of liquidity and diversity to an institution's funding base.
    FDIC staff agrees that covered bonds may be a useful liquidity tool 
for IDIs as part of an overall prudent liquidity management framework 
and within the parameters set forth in the Policy Statement. While 
covered bonds, like other secured liabilities, could increase the costs 
to the Deposit Insurance Fund in a receivership, these potential costs 
must be balanced with diversification of sources of liquidity and the 
benefits that accrue from additional on-balance sheet alternatives to 
securitization for financing mortgage lending. The Policy Statement 
seeks to balance these considerations by clarifying the circumstances 
and the specific covered bond transactions for which the FDIC will 
grant consent to access pledged covered bond collateral. Staff believes 
that the prudential limitations identified in the Policy Statement 
permit the incremental development of the covered bond market, while 
allowing the FDIC, and other regulators, the opportunity to evaluate 
these transactions within the U.S. mortgage market. In fulfillment of 
its responsibilities as deposit insurer and receiver for failed IDIs, 
the FDIC will continue to review the development of the covered bond 
marketplace in the U.S. and abroad to gain further insights into the 
appropriate role of covered bonds in IDI funding and the U.S. mortgage 
market, and their potential consequences for the Deposit Insurance 
Fund. (For ease of reference, throughout this Policy Statement when we 
refer to ``covered bond obligation,'' we are referencing the part of 
the covered bond transaction comprising the IDI's debt obligation, 
whether to the SPV, mortgage bond trustee, or other parties; and 
``covered bond obligee'' is the entity to which the IDI is indebted.)
    Under Federal Deposit Insurance Act, when the FDIC is appointed 
conservator or receiver of an IDI, contracting parties cannot terminate 
agreements with the IDI because of the insolvency itself or the 
appointment of the conservator or receiver. In addition, contracting 
parties must obtain the FDIC's consent during the forty-five day period 
after appointment of FDIC as conservator, or during the ninety day 
period after appointment of FDIC as receiver before, among other 
things, terminating any contract or liquidating any collateral pledged 
for a secured transaction. During this period, the FDIC must still 
comply with otherwise enforceable provisions of the contract. The FDIC 
also may terminate or repudiate any agreement of the IDI within a 
reasonable time after the FDIC's appointment as conservator or receiver 
if the conservator or receiver determines that the agreement is 
burdensome and that the repudiation will promote the orderly 
administration of the IDI's affairs.\1\ The questions to the FDIC for 
guidance have focused principally on the conditions under which the 
FDIC would grant consent to obtain collateral for a covered bond 
transaction before the expiration of the forty-five day period after 
appointment of a conservator or the ninety day period after appointment 
of a receiver.
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    \1\ See 12 U.S.C. Sec. Sec.  1821(e)(3) and (13). These 
provisions do not apply in the manner stated to ``qualified 
financial contracts'' as defined in Section 11(e) of the FDI Act. 
See 12 U.S.C. Sec. Sec.  1821(e)(8).
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    IDIs interested in issuing covered bonds have expressed concern 
that the requirement to seek the FDIC's consent before exercising on 
the collateral after a breach could interrupt payments to the covered 
bond obligee for as long as 90 days. IDIs can provide for additional 
liquidity or other hedges to accommodate this potential risk to the 
continuity of covered bond payments, but at an additional cost to the

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transaction. Interested parties have requested that the FDIC provide 
clarification about how FDIC would apply the consent requirement with 
respect to covered bonds. Accordingly, the FDIC has determined to issue 
this Policy Statement in order to provide covered bond issuers with 
guidance on how the FDIC will treat covered bonds in a conservatorship 
or receivership.

II. Interim Final Policy

    For the purposes of this Policy Statement, a ``covered bond'' is 
defined as a recourse debt obligation of an insured depository 
institution with a term greater than one year and no more than ten 
years, that is secured directly or indirectly by a pool of mortgage 
loans or, not exceeding ten percent of the collateral, by AAA-rated 
mortgage bonds. The term ``covered bond obligee'' is the entity to 
which the IDI is indebted.
    To provide guidance to potential covered bond issuers and 
investors, while allowing the FDIC to evaluate the potential benefits 
and risks that covered bond transactions may pose to the Deposit 
Insurance Fund in the U.S. mortgage market, the application of the 
policy statement is limited to covered bonds that meet the following 
standards.
    This Policy Statement only applies to covered bond issuances made 
with the consent of the IDI's primary federal regulator in which the 
IDI's total covered bond obligations at such issuance comprise no more 
than 4% of an IDI's total liabilities. The FDIC is concerned that 
unrestricted growth while the FDIC is evaluating the potential benefits 
and risks of covered bonds could excessively increase the proportion of 
secured liabilities to unsecured liabilities on IDI balance sheets at 
the expense of the Deposit Insurance Fund. In a failure, secured 
liabilities on a financial institution's balance sheet are satisfied 
out of the pledged assets before any of the remaining value in those 
assets is made available to satisfy the claims of depositors (including 
the Deposit Insurance Fund as subrogee of the insured depositors) and 
general creditors. The larger the balance of secured liabilities on the 
balance sheet, the smaller the value of assets that are available to 
satisfy depositors and general creditors, and consequently the greater 
the potential loss to the Deposit Insurance Fund. To address these 
concerns, the Policy Statement is limited to covered bonds that 
comprise no more than 4% of a financial institution's total liabilities 
after issuance.
    In order to limit the risks to the Deposit Insurance Fund, the 
Policy Statement limits its application to ``eligible mortgages,'' 
defined as covered bond issuances secured by perfected security 
interests under applicable state and federal law on performing 
mortgages on one-to-four family residential properties, underwritten at 
the fully indexed rate and relying on documented income. The Policy 
Statement provides that eligible mortgages shall be underwritten in 
accordance with existing supervisory guidance governing the 
underwriting of residential mortgages, including the Interagency 
Guidance on Non-Traditional Mortgage Products, October 5, 2006, and the 
Interagency Statement on Subprime Mortgage Lending, July 10, 2007, and 
such other guidance applicable at the time such covered bonds are 
issued by any IDI.
    The FDIC recognizes that some covered bond programs include 
mortgage-backed securities in limited quantities. Staff believes that 
allowing some limited inclusion of AAA-rated mortgage-backed securities 
as collateral for covered bonds during this interim, evaluation period 
will support enhanced liquidity for mortgage finance without increasing 
the risks to the Deposit Insurance Fund. Therefore, covered bonds that 
include up to 10% of their collateral in AAA-rated mortgage securities 
backed solely by mortgage loans that are made in compliance with 
guidance referenced above will meet the standards set forth in the 
Policy Statement. Securities backed by tranches in other securities or 
assets (such as Collateralized Debt Obligations) would not be 
considered to be acceptable collateral.
    The Policy Statement provides that the consent of the FDIC, as 
conservator or receiver, is given to covered bond obligees to exercise 
their contractual rights over collateral for covered bond transactions 
conforming to the Policy Statement no sooner than ten (10) business 
days after a monetary default on an IDI's obligation to the covered 
bond obligee, as defined below, or ten (10) business days after the 
effective date of repudiation as provided in a written notice by the 
conservator or receiver.
    The FDIC anticipates that future developments in the marketplace 
may present interim final covered bond structures and structural 
elements that are not encompassed within this Policy Statement. FDIC 
invites comment on whether this Policy Statement should be limited to 
the currently defined structures or open to future innovations in how 
covered bond transactions may be structured in the U.S., and if so, how 
any future policy should be applied to such innovative elements.
    From an insurance perspective, the FDIC seeks comment on whether 
the issuances of covered bonds should increase an institution's 
insurance assessment rate or should be included in an institution's 
assessment base. If so, should such assessment rate increases or 
inclusion in assessment base only apply when an institution's covered 
bond liability exceeds 4% of its total liabilities. More generally, the 
FDIC seeks comment on whether an institution's percentage of secured 
liabilities to total liabilities should be factored into an 
institution's insurance assessment rate or whether the total secured 
liabilities should be included in the assessment base. Finally, FDIC 
also seeks comment on whether, as part of this Policy Statement, there 
should also be an overall cap for secured liabilities.

III. Scope and Applicability

    This Policy Statement applies to the FDIC in its capacity as 
conservator or receiver of an insured depository institution.
    This Policy Statement only addresses the rights of the FDIC under 
12 U.S.C. 1821(e)(13)(C). A previous policy statement entitled 
``Statement of Policy on Foreclosure Consent and Redemption Rights,'' 
August 17, 1992, separately addresses consent under 12 U.S.C. 1825(b), 
and should be separately consulted.
    This Policy Statement does not authorize, and shall not be 
construed as authorizing, the waiver of the prohibitions in 12 U.S.C. 
1825(b)(2) against levy, attachment, garnishment, foreclosure or sale 
of property of the FDIC, nor does it authorize or shall it be construed 
as authorizing the attachment of any involuntary lien upon the property 
of the FDIC. The Policy Statement provides that it shall not be 
construed as waiving, limiting or otherwise affecting the rights or 
powers of the FDIC to take any action or to exercise any power not 
specifically mentioned, including but not limited to any rights, powers 
or remedies of the FDIC regarding transfers taken in contemplation of 
the institution's insolvency or with the intent to hinder, delay or 
defraud the institution or the creditors of such institution, or that 
is a fraudulent transfer under applicable law.

Request for Public Comment

    The Board of Directors of the FDIC has adopted an interim final 
Covered Bond Policy Statement. The FDIC requests public comment on the 
interim

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final Covered Bond Policy Statement. The text of the Covered Bond 
Policy Statement follows:

Covered Bond Policy Statement

Background

    Insured depository institutions (``IDIs'') are showing increasing 
interest in issuing covered bonds. Although covered bond structures 
vary, in all covered bonds the IDI issues a debt obligation secured by 
a pledge of assets, typically mortgages. The debt obligation is either 
a covered bond sold directly to investors, or mortgage bonds which are 
sold to a trust or similar entity (``special purpose vehicle'' or 
``SPV'') as collateral for the SPV to sell covered bonds to investors. 
In either case, the IDI's debt obligation is secured by a perfected 
first priority security interest in pledged mortgages, which remain on 
the IDI's balance sheet. Proponents argue that covered bonds provide 
new and additional sources of liquidity and diversity to an 
institution's funding base. Based upon the information available to 
date, the FDIC agrees that covered bonds may be a useful liquidity tool 
for IDIs as part of an overall prudent liquidity management framework 
and the parameters set forth in this policy statement. Because of the 
increasing interest IDIs have in issuing covered bonds, the FDIC has 
determined to issue this policy statement with respect to covered 
bonds.
    (a) Definitions.
    (1) For the purposes of this policy statement, a ``covered bond'' 
shall be defined as a recourse debt obligation of an IDI with a term 
greater than one year and no more than ten years, that is secured 
directly or indirectly by perfected security interests under applicable 
state and federal law on eligible mortgages, or, for no more than ten 
percent of the collateral for any covered bond issuance or series, AAA-
rated mortgage-backed securities secured by eligible mortgages.
    (2) The term ``eligible mortgages'' shall mean performing mortgages 
on one-to-four family residential properties, underwritten at the fully 
indexed rate and relying on documented income in accordance with 
existing supervisory guidance governing the underwriting of residential 
mortgages, including the Interagency Guidance on Non-Traditional 
Mortgage Products, October 5, 2006, and the Interagency Statement on 
Subprime Mortgage Lending, July 10, 2007, and such other guidance 
applicable at the time such covered bonds are issued by any IDI.
    (3) The term ``covered bond obligation,'' shall be defined as the 
portion of the covered bond transaction that is the insured depository 
institution's debt obligation, whether to the SPV, mortgage bond 
trustee, or other parties.
    (4) The term ``covered bond obligee'' is the entity to which the 
insured depository institution is indebted.
    (5) The term ``monetary default'' shall mean the failure to pay 
when due (taking into account any period for cure of such failure or 
for forbearance provided under the instrument or in law) sums of money 
that are owed, without dispute, to the covered bond obligee under the 
terms of any bona fide instrument creating the obligation to pay.
    (6) The term ``total liabilities'' shall mean, for banks that file 
quarterly Reports of Condition and Income (Call Reports), line 21 
``Total liabilities'' (Schedule RC); and for thrifts that file 
quarterly Thrift Financial Reports (TFRs), line SC70 ``Total 
liabilities'' (Schedule SC).
    (b) Coverage. This policy statement only applies to covered bond 
issuances made with the consent of the IDI's primary federal regulator 
in which the insured depository institution's total covered bond 
obligation at such issuance comprises no more than 4% of an insured 
depository institution's total liabilities, and only so long as the 
assets securing the covered bond obligation are eligible mortgages. 
Additionally, no more than ten percent of the collateral for any 
covered bond issuance or series may consist of AAA-rated mortgage 
securities backed solely by eligible mortgages that are considered to 
be acceptable collateral under the standards set forth in this policy 
statement.
    (c) Consent to certain actions. The FDIC as conservator or receiver 
consents to a covered bond obligee's exercise of the rights and powers 
listed in 12 U.S.C. 1821(e)(13)(C), and will not assert any rights to 
which it may be entitled pursuant to 12 U.S.C. 1821(e)(13)(C), after 
the expiration of the specified amount of time, and the occurrence of 
the following events:
    (1) If at any time after appointment the conservator or receiver is 
in a monetary default to a covered bond obligee, as defined above, and 
remains in monetary default for ten (10) business days after actual 
delivery of a written request to the FDIC pursuant to paragraph (d) 
hereof to exercise contractual rights because of such monetary default, 
the FDIC hereby consents pursuant to 12 U.S.C. 1821(e)(13)(C) to the 
covered bond obligee's exercise of any such contractual rights, 
including liquidation of properly pledged collateral by commercially 
reasonable methods, provided no involvement of the receiver or 
conservator is required.
    (2) If the FDIC as conservator or receiver of an insured depository 
institution provides a written notice of repudiation of a contract to a 
covered bond obligee, and the FDIC does not pay the damages pursuant to 
12 U.S.C. 1821(e) by reason of such repudiation within ten (10) 
business days after the effective date of the notice, the FDIC hereby 
consents pursuant to 12 U.S.C. 1821(e)(13)(C) for the covered bond 
obligee's exercise of any of its contractual rights, including 
liquidation of properly pledged collateral by commercially reasonable 
methods, provided no involvement of the receiver or conservator is 
required.
    (d) Consent. Anyone requesting the FDIC's consent as conservator or 
receiver pursuant to 12 U.S.C. 1821(e)(13)(C) pursuant to this policy 
statement should provide to Robert E. Feldman, Executive Secretary, 
Legal Division, Federal Deposit Insurance Corporation, 550 17th Street, 
NW., Washington DC 20429-0002, a statement of the basis upon which such 
request is made, and copies of all documentation supporting such 
request, including without limitation a copy of the applicable contract 
and of any applicable notices under the contract.
    (e) Limitations. The consents set forth in this policy statement do 
not act to waive or relinquish any rights granted to the FDIC in any 
capacity, pursuant to any other applicable law or any agreement or 
contract. Nothing contained in this policy alters the claims priority 
of collateralized obligations. Nothing contained in this policy 
statement shall be construed as permitting the avoidance of any legally 
enforceable or perfected security interest in any of the assets of an 
insured depository institution, provided such interest is not taken in 
contemplation of the institution's insolvency, or with the intent to 
hinder, delay or defraud the IDI or its creditors. Subject to the 
provisions of 12 U.S.C. 1821(e)(13)(C), nothing contained in this 
policy statement shall be construed as permitting the conservator or 
receiver to fail to comply with otherwise enforceable provisions of a 
contract or preventing a covered bond obligee's exercise of any of its 
contractual rights, including liquidation of properly pledged 
collateral by commercially reasonable methods.
    (f) No waiver. This policy statement does not authorize, and shall 
not be construed as authorizing the waiver of the prohibitions in 12 
U.S.C. 1825(b)(2)

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against levy, attachment, garnishment, foreclosure, or sale of property 
of the FDIC, nor does it authorize nor shall it be construed as 
authorizing the attachment of any involuntary lien upon the property of 
the FDIC. Nor shall this policy statement be construed as waiving, 
limiting or otherwise affecting the rights or powers of the FDIC to 
take any action or to exercise any power not specifically mentioned, 
including but not limited to any rights, powers or remedies of the FDIC 
regarding transfers taken in contemplation of the institution's 
insolvency or with the intent to hinder, delay or defraud the 
institution or the creditors of such institution, or that is a 
fraudulent transfer under applicable law.
    (g) No assignment. The right to consent under 12 U.S.C. 
1821(e)(13)(C) may not be assigned or transferred to any purchaser of 
property from the FDIC, other than to a conservator or bridge bank.
    (h) Repeal. This policy statement may be amended or repealed by the 
FDIC upon no less than 30 days' notice provided in the Federal 
Register, but any amendment or repeal shall not apply to any covered 
bonds issued in accordance with this policy statement before such 
amendment or repeal becomes effective,

    By order of the Board of Directors:

    Dated at Washington, DC this 15th day of April, 2008.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
 [FR Doc. E8-8750 Filed 4-22-08; 8:45 am]
BILLING CODE 6714-01-P