Covered Bonds Regulatory Update: The Good, the Bad, and the United States

Abstract

While covered bond regulation has been stalled in the United States, partly because of concerns raised by the U.S. Federal Deposit Insurance Corporation (FDIC), an increasing number of non-U.S. covered bond issuers have considered accessing the U.S. market through SEC-registered covered bonds, and regulators outside of the United States have increasingly moved toward more comprehensive regulation of covered bonds. New regulatory regimes seem to create tension between regulatory incentives to purchase and hold covered bonds as high-quality assets and significant limitations on their issuance. This article explores these themes, first discussing the new covered bond legislation in Canada, which illustrates the move from a relatively unregulated system to a heavily regulated system. The article then discusses regulatory developments outside of North America, which exemplify the tension that may be created by new regulatory systems. The article explores recent legislations limiting covered bond issuance as a source of asset encumbrance and then examines CRD IV and Solvency II, two regulatory reforms that incentivize banks and insurers to acquire and to retain covered bonds.