Covered Bond Policy Statement, 43754-43759 [E8-17168]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 73, Number 145 (Monday, July 28, 2008)]
[Notices]
[Pages 43754-43759]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-17168]


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FEDERAL DEPOSIT INSURANCE CORPORATION


Covered Bond Policy Statement

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final Statement of Policy.

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SUMMARY: The Federal Deposit Insurance Corporation (the FDIC) is 
publishing a final policy statement on the treatment of covered bonds 
in a conservatorship or receivership. This policy statement provides 
guidance on the availability of expedited access to collateral pledged 
for certain covered bonds after the FDIC decides whether to terminate 
or continue the transaction. Specifically, the policy statement 
clarifies how the FDIC will apply the consent requirements of section 
11(e)(13)(C) of the Federal Deposit Insurance Act (FDIA) to such 
covered bonds to facilitate the prudent development of the U.S. covered 
bond market consistent with the FDIC's responsibilities as conservator 
or receiver for insured depository institutions (IDI). As the U.S. 
covered bond market develops, future modifications or amendments may be 
considered by the FDIC.

DATES: Effective Date: July 28, 2008.

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

    On April 23, 2008, the FDIC published the Interim Final Covered 
Bond Policy Statement for public comment. 73 FR 21949 (April 23, 2008). 
After carefully reviewing and considering all comments, the FDIC has 
adopted certain limited revisions and clarifications to the Interim 
Policy Statement (as discussed in Part II) in the Final Policy 
Statement.\1\
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    \1\ For ease of reference, the Interim Final Covered Bond Policy 
Statement, published on April 23, 2008, will be referred to as the 
Interim Policy Statement. The Final Covered Bond Policy Statement 
will be referred to as the Policy Statement.
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    Currently, there are no statutory or regulatory prohibitions on the 
issuance of covered bonds by U.S. banks. Therefore, to reduce market 
uncertainty and clarify the application of the FDIC's statutory 
authorities for U.S. covered bond transactions, the FDIC issued an 
Interim Policy Statement to provide guidance on the availability of 
expedited access to collateral pledged for certain covered bonds by 
IDIs in a conservatorship or a receivership. As discussed below, under 
section 11(e)(13)(C) of the FDIA, any liquidation of collateral of an 
IDI placed into conservatorship or receivership requires the consent of 
the FDIC during the initial 45 days or 90 days after its appointment, 
respectively. Consequently, issuers of covered bonds have incurred 
additional costs from maintaining 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 during these periods after any decision by the FDIC 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 expedited access 
to pledged covered bond collateral.
    Covered bonds are general, non-deposit 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. These 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'').\2\ 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.
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    \2\ The FDIC understands that certain potential issuers may 
propose a different structure that does not involve the use of an 
SPV. The FDIC expresses no opinion about the appropriateness of SPV 
or so-called ``direct issuance'' covered bond structures, although 
both may comply with this Statement of Policy.
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    The FDIC 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 conditions and 
circumstances under which the FDIC will grant automatic consent to 
access pledged covered bond collateral. The FDIC believes that the 
prudential limitations set forth 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 insight 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 discussion, when we refer 
to ``covered bond obligation,'' we are referring to 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 the FDIA, 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

[[Page 43755]]

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.\3\ During this period, the FDIC must still comply 
with otherwise enforceable provisions of the contract. The FDIC also 
may terminate or repudiate any contract 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.\4\
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    \3\ See 12 U.S.C. 1821(e)(13)(C).
    \4\ See 12 U.S.C. 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. 1821(e)(8).
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    As conservator or receiver for an IDI, the FDIC has three options 
in responding to a properly structured covered bond transaction of the 
IDI: (1) Continue to perform on the covered bond transaction under its 
terms; (2) pay off the covered bonds in cash up to the value of the 
pledged collateral; or (3) allow liquidation of the pledged collateral 
to pay off the covered bonds. If the FDIC adopts the first option, it 
would continue to make the covered bond payments as scheduled. The 
second or third options would be triggered if the FDIC repudiated the 
transaction or if a monetary default occurred. In both cases, the par 
value of the covered bonds plus interest accrued to the date of the 
appointment of the FDIC as conservator or receiver would be paid in 
full up to the value of the collateral. If the value of the pledged 
collateral exceeded the total amount of all valid claims held by the 
secured parties, this excess value or over collateralization would be 
returned to the FDIC, as conservator or receiver, for distribution as 
mandated by the FDIA. On the other hand, if there were insufficient 
collateral pledged to cover all valid claims by the secured parties, 
the amount of the claims in excess of the pledged collateral would be 
unsecured claims in the receivership.
    While the FDIC can repudiate the underlying contract, and thereby 
terminate any continuing obligations under that contract, the FDIA 
prohibits the FDIC, as conservator or receiver from avoiding any 
legally enforceable or perfected security interest in the assets of the 
IDI unless the interest was taken in contemplation of the IDI's 
insolvency or with the intent to hinder, delay, or defraud the IDI or 
its creditors.\5\ This statutory provision ensures protection for the 
valid claims of secured creditors up to the value of the pledged 
collateral. After a default or repudiation, the FDIC as conservator or 
receiver may either pay resulting damages in cash up to the value of 
the collateral or turn over the collateral to the secured party for 
liquidation. For example, if the conservator or receiver repudiated a 
covered bond transaction, as discussed in Part II below, it would pay 
damages limited to par value of the covered bonds and accrued interest 
up to the date of appointment of the conservator or receiver, if 
sufficient collateral was in the cover pool, or turn over the 
collateral for liquidation with the conservator or receiver recovering 
any proceeds in excess of those damages. In liquidating any collateral 
for a covered bond transaction, it would be essential that the secured 
party liquidate the collateral in a commercially reasonable and 
expeditious manner taking into account the then-existing market 
conditions.
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    \5\ See 12 U.S.C. 1821(e)(12).
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    As noted above, existing covered bond transactions by U.S. issuers 
have used SPVs. However, nothing in the Policy Statement requires the 
use of an SPV. Some questions have been posed about the treatment of a 
subsidiary or SPV after appointment of the FDIC as conservator or 
receiver. The FDIC applies well-defined standards to determine whether 
to treat such entities as ``separate'' from the IDI. If a subsidiary or 
SPV, in fact, has fulfilled all requirements for treatment as a 
``separate'' entity under applicable law, the FDIC as conservator or 
receiver has not applied its statutory powers to the subsidiary's or 
SPV's contracts with third parties. While the determination of whether 
a subsidiary or SPV has been organized and maintained as a separate 
entity from the IDI must be determined based on the specific facts and 
circumstances, the standards for such decisions are set forth in 
generally applicable judicial decisions and in the FDIC's regulation 
governing subsidiaries of insured state banks, 12 CFR 362.4.
    The requests 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. 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 transaction. Interested 
parties 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 Final Covered Bond 
Policy Statement in order to provide covered bond issuers with final 
guidance on how the FDIC will treat covered bonds in a conservatorship 
or receivership.

II. Overview of the Comments

    The FDIC received approximately 130 comment letters on the Interim 
Policy Statement; these included comments from national banks, Federal 
Home Loan Banks, industry groups and individuals.
    Most commenters encouraged the FDIC to adopt the Policy Statement 
to clarify how the FDIC would treat covered bonds in the case of a 
conservatorship or receivership and, thereby, facilitate the 
development of the U.S. covered bond market. The more detailed comments 
focused on one or more of the following categories of issues: (1) The 
FDIC's discretion regarding covered bonds that do not comply with the 
Policy Statement; (2) application to covered bonds completed prior to 
the Policy Statement; (3) the limitation of the Policy Statement to 
covered bonds not exceeding 4 percent of liabilities; (4) the eligible 
collateral for the cover pools; (5) the measure of damages provided in 
the event of default or repudiation; (6) the covered bond term limit; 
and (7) federal home loan bank advances and assessments.
    Certain banks and industry associations sought clarification about 
the treatment of covered bonds that do not comply with the Policy 
Statement by the FDIC as conservator or receiver. Specifically, 
commenters asked the FDIC to clarify that if a covered bond issuance is 
not in conformance with the Policy Statement, the FDIC retains 
discretion to grant consent prior to expiration of the 45 or 90 day 
period on a case-by-case basis. Under Section 11(e)(13)(C) of the FDIA, 
the exercise of any right or power to terminate, accelerate, declare a 
default, or otherwise affect any contract of the IDI, or to take 
possession of any property of the IDI, requires the consent of the 
conservator or receiver, as appropriate,

[[Page 43756]]

during the 45-day period or 90-day period after the date of the 
appointment of the conservator or receiver, as applicable. By the 
statutory terms, the conservator or receiver retains the discretion to 
give consent on a case-by-case basis after evaluation by the FDIC upon 
the failure of the issuer.
    Comments from banks who issued covered bonds prior to the Policy 
Statement requested either `grandfathering' of preexisting covered 
bonds or an advance determination by the FDIC before any appointment of 
a conservator or receiver that specific preexisting covered bonds 
qualified under the Policy Statement. After carefully considering the 
comments, the FDIC has determined that to `grandfather' or otherwise 
permit mortgages or other collateral that do not meet the specific 
requirements of the Policy Statement to support covered bonds would not 
promote stable and resilient covered bonds as encompassed within the 
Policy Statement. If preexisting covered bonds, and their collateral, 
otherwise qualify under the standards specified in the Policy 
Statement, those covered bonds would be eligible for the expedited 
access to collateral provided by the Policy Statement.
    A number of commenters requested that the limitation of eligible 
covered bonds to no more than 4 percent of an IDI's total liabilities 
should be removed or increased. Commenters also noted that other 
countries applying a cap have based the limitation on assets, not 
liabilities. The Policy Statement applies to covered bond issuances 
that comprise no more than 4 percent of an institution's total 
liabilities since, in part, as the proportion of secured liabilities 
increases, the total unpledged assets available to satisfy the claims 
of uninsured depositors and other creditors from the Deposit Insurance 
Fund decrease. As a result, the FDIC must focus on the share of an 
IDI's liabilities that are secured by collateral and balance the 
additional potential losses in the failure of an IDI against the 
benefits of increased liquidity for open institutions. The 4 percent 
limitation under the Policy Statement is designed to permit the FDIC, 
and other regulators, an opportunity to evaluate the development of the 
covered bond market within the financial system of the United States, 
which differs in many respects from that in other countries deploying 
covered bonds. Consequently, while changes may be considered to this 
limitation as the covered bond market develops, the FDIC has decided 
not to make any change at this time.
    A number of commenters sought expansion of the mortgages defined as 
``eligible mortgages'' and the expansion of collateral for cover pools 
to include other assets, such as second-lien home equity loans and home 
equity lines of credit, credit card receivables, mortgages on 
commercial properties, public sector debt, and student loans. Other 
commenters requested that ``eligible mortgages'' should be defined 
solely by their loan-to-value (LTV) ratios. After considering these 
comments, the FDIC has determined that its interests in efficient 
resolution of IDIs, as well as in the initial development of a 
resilient covered bond market that can provide reliable liquidity for 
well-underwritten mortgages, support retention of the limitations on 
collateral for qualifying covered bonds in the Interim Policy 
Statement. Recent market experience demonstrates that many mortgages 
that would not qualify under the Policy Statement, such as low 
documentation mortgages, have declined sharply in value as credit 
conditions have deteriorated. Some of the other assets proposed are 
subject to substantial volatility as well, while others would not 
specifically support additional liquidity for well-underwritten 
residential mortgages. As noted above, certain provisions of the Policy 
Statement may be reviewed and reconsidered as the U.S. covered bond 
market develops.
    With regard to the comments that LTV be used as a guide to 
determine an ``eligible mortgage,'' the FDIC does not believe that LTV 
can substitute for strong underwriting criteria to ensure sustainable 
mortgages. In response to the comments, and the important role that LTV 
plays in mortgage analysis, the Policy Statement will urge issuers to 
disclose LTV for mortgages in the cover pool to enhance transparency 
for the covered bond market and promote stable cover pools. However, no 
specific LTV limitation will be imposed.
    Two commenters suggested that the Policy Statement should be 
clarified to permit the substitution of cash as cover pool collateral. 
The Policy Statement has been modified to allow for the substitution of 
cash and Treasury and agency securities. The substitution of such 
collateral does not impair the strength of the cover pool and may be an 
important tool to limit short-term strains on issuing IDIs if eligible 
mortgages or AAA-rated mortgage securities must be withdrawn from the 
cover pool.
    A number of commenters requested guidance on the calculation of 
damages the receiver will pay to holders of covered bonds in the case 
of repudiation or default. Under 12 U.S.C. 1821(e)(3), the liability of 
the conservator or receiver for the disaffirmance or repudiation of any 
contract is limited to ``actual direct compensatory damages'' and 
determined as of the date of appointment of the conservator or 
receiver. In the repudiation of contracts, such damages generally are 
defined by the amount due under the contract repudiated, but excluding 
any amounts for lost profits or opportunities, other indirect or 
contingent claims, pain and suffering, and exemplary or punitive 
damages. Under the Policy Statement, the FDIC agrees that ``actual 
direct compensatory damages'' due to bondholders, or their 
representative(s), for repudiation of covered bonds will be limited to 
the par value of the bonds plus accrued interest as of the date of 
appointment of the FDIC as conservator or receiver. The FDIC 
anticipates that IDIs issuing covered bonds, like other obligations 
bearing interest rate or other risks, will undertake prudent hedging 
strategies for such risks as part of their risk management program.
    Many commenters suggested that the 10-year term limit should be 
removed to permit longer-term covered bond maturities. After reviewing 
the comments, the FDIC agrees that longer-term covered bonds should not 
pose a significant, additional risk and may avoid short-term funding 
volatility. Therefore, the FDIC has revised the Interim Policy 
Statement by increasing the term limit for covered bonds from 10 years 
to 30 years.
    A number of the Federal Home Loan Banks, and their member 
institutions, objected to the inclusion of FHLB advances in the 
definition of ``secured liabilities,'' any imposed cap on such 
advances, and any change in assessment rates. Under 12 CFR part 360.2 
(Federal Home Loan Banks as Secured Creditors), secured liabilities 
include loans from the Federal Reserve Bank discount window, Federal 
Home Loan Bank (FHLB) advances, repurchase agreements, and public 
deposits. However, the Policy Statement does not impose a cap on FHLB 
advances and has no effect on an IDI's ability to obtain FHLB advances 
or its deposit insurance assessments. The Policy Statement solely 
addresses covered bonds.
    However, as noted above, where an IDI relies very heavily on 
secured liabilities to finance its lending and other business 
activities, it does pose a greater risk of loss to the Deposit 
Insurance Fund in any failure. Should the covered bond market develop 
as a significant source of funding for IDIs, and should that 
development create

[[Page 43757]]

substantial increases in an IDI's reliance on secured funding, it would 
increase the FDIC's losses in a failure and perhaps outweigh the 
benefits of improved liquidity. As a result, it is appropriate for the 
FDIC to consider the risks of such increased losses. Consideration of 
these risks may occur in a possible future request for comments on 
secured liabilities, but they are not addressed in this Policy 
Statement.

III. Final Statement of Policy

    For the purposes of this final Policy Statement, a ``covered bond'' 
is defined as a non-deposit, recourse debt obligation of an IDI with a 
term greater than one year and no more than thirty years, that is 
secured directly or indirectly by a pool of eligible mortgages 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 percent 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. 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 
percent of a financial institution's total liabilities after issuance.
    In order to limit the risks to the deposit insurance fund, 
application of the Policy Statement is restricted to covered bond 
issuances secured by perfected security interests under applicable 
state and federal law on performing eligible mortgages on one-to-four 
family residential properties, underwritten at the fully indexed rate 
and relying on documented income, a limited volume of AAA-rated 
mortgage securities, and certain substitution collateral. The Policy 
Statement provides that the mortgages shall be underwritten at the 
fully indexed rate relying on documented income, and comply 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 additional guidance 
applicable at the time of loan origination. In addition, the Policy 
Statement requires that the eligible mortgages and other collateral 
pledged for the covered bonds be held and owned by the IDI. This 
requirement is designed to protect the FDIC's interests in any over 
collateralization and avoid structures involving the transfer of the 
collateral to a subsidiary or SPV at initiation or prior to any IDI 
default under the covered bond transaction.
    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 percent 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. In addition, substitution collateral for the covered 
bonds may include cash and Treasury and agency securities as necessary 
to prudently manage the cover pool. Securities backed by tranches in 
other securities or assets (such as Collateralized Debt Obligations) 
are not considered to be acceptable collateral.
    The Policy Statement provides that the consent of the FDIC, as 
conservator or receiver, is provided to covered bond obligees to 
exercise their contractual rights over collateral for covered bond 
transactions conforming to the Interim 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 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 and 
therefore the FDIC may consider future amendment (with appropriate 
notice) of this Policy Statement as the U.S. covered bond market 
develops.

IV. 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.
    The Board of Directors of the FDIC has adopted a 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

[[Page 43758]]

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 non-deposit, recourse debt obligation of an IDI 
with a term greater than one year and no more than thirty years, that 
is secured directly or indirectly by perfected security interests under 
applicable state and federal law on assets held and owned by the IDI 
consisting of eligible mortgages, or AAA-rated mortgage-backed 
securities secured by eligible mortgages if for no more than ten 
percent of the collateral for any covered bond issuance or series. Such 
covered bonds may permit substitution of cash and United States 
Treasury and agency securities for the initial collateral as necessary 
to prudently manage the cover pool.
    (2) The term ``eligible mortgages'' shall mean performing first-
lien mortgages on one-to-four family residential properties, 
underwritten at the fully indexed rate \6\ and relying on documented 
income, and complying 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 additional guidance applicable at the time of loan origination. 
Due to the predictive quality of loan-to-value ratios in evaluating 
residential mortgages, issuers should disclose loan-to-value ratios for 
the cover pool to enhance transparency for the covered bond market.
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    \6\ The fully indexed rate equals the index rate prevailing at 
origination plus the margin to be added to it after the expiration 
of an introductory interest rate. For example, assume that a loan 
with an initial fixed rate of 7% will reset to the six-month London 
Interbank Offered Rate (LIBOR) plus a margin of 6%. If the six-month 
LIBOR rate equals 5.5%, lenders should qualify the borrower at 11.5% 
(5.5% + 6%), regardless of any interest rate caps that limit how 
quickly the fully indexed rate may be reached.
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    (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 IDI's total covered bond obligation as a result of such 
issuance comprises no more than 4 percent of an IDI's total 
liabilities, and only so long as the assets securing the covered bond 
obligation are eligible mortgages or AAA-rated mortgage securities on 
eligible mortgages, if not exceeding 10 percent of the collateral for 
any covered bond issuance, Substitution for the initial cover pool 
collateral may include cash and Treasury and agency securities as 
necessary to prudently manage the cover pool.
    (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 and expeditious methods taking into account existing market 
conditions, 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 due 
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 
and expeditious methods taking into account existing market conditions, 
provided no involvement of the receiver or conservator is required.
    (3) The liability of a conservator or receiver for the 
disaffirmance or repudiation of any covered bond issuance obligation, 
or for any monetary default on, any covered bond issuance, shall be 
limited to the par value of the bonds issued, plus contract interest 
accrued thereon to the date of appointment of the conservator or 
receiver.
    (d) Consent. Any party 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 the Deputy Director, Division of 
Resolutions and Receiverships, Federal Deposit Insurance Corporation, 
550 17th Street, NW., F-7076, 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,

[[Page 43759]]

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) 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 repealed by the FDIC upon 
30 days notice provided in the Federal Register, but any repeal shall 
not apply to any covered bond issuance made in accordance with this 
policy statement before such repeal.

    By order of the Board of Directors.

    Dated at Washington, DC this 22d day of July, 2008.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. E8-17168 Filed 7-25-08; 8:45 am]
BILLING CODE 6714-01-P