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FDIC Federal Register Citations

[Federal Register: April 23, 2008 (Volume 73, Number 79)]
[Notices]
[Page 21949-21953]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23ap08-73]

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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: comments@fdic.gov. 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

[[Page 21951]]

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

[[Page 21952]]

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)

[[Page 21953]]

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
 


Last Updated 04/14/2008 Regs@fdic.gov