Proponents of covered bonds fear that the Federal Deposit Insurance Corporation is seeking changes to the proposed US Covered Bond Act of 2011 that would impede the development of a market, possibly via an overcollateralisation (OC) limit so low as to render covered bonds unworkable.

The markup is scheduled for the Capital Markets & Government Sponsored Enterprises Subcommittee of the House Financial Services Committee, which is chaired by Republican Congressman Scott Garrett. The subcommittee on 11 March held a hearing on the bill, which was introduced by Garrett and is co-sponsored by Democrat Carolyn Maloney.

One market participant said that the FDIC is expected to put forward an amendment to the bill that would only allow covered bonds in a form that would either be too costly for issuers to structure, or that would not be secure enough for investors to want to invest at a level that would make them feasible. The FDIC has previously stymied attempts to introduce covered bond legislation because covered bonds subordinate depositors’ claims against the cover pool and it is concerned about greater losses for the Deposit Insurance Fund.

“They will go on saying that they like covered bonds,” he said, “but only on their own terms. They are trying to get away with the argument that it must be possible for these things to happen and for them to be happy, but the reality is that it’s going to be very difficult to square their requirements with what the market currently needs.”

Another market participant said that he understands that the FDIC is seeking to limit overcollateralisation levels on covered bonds to just 2%.

“The FDIC has said that they’d like to put an overcollateralisation cap at 102% [of covered bonds outstanding], which is totally absurd,” he said.

In a survey on banks’ use of covered bond funding published in March, Fitch found that the lowest average level of overcollateralisation between cover pools and covered bonds of 11 countries surveyed was 19%, in Norway. And in Germany and France, for example, 2% is the minimum level of overcollateralisation required by law.

“I just hope that they are overplaying their hand by insisting upon this,” said the market participant.

He said that he is hopeful that the bill will get through the markup without being hit by any changes that might be put forward on behalf of the FDIC. The usual next steps would then be for the bill to go through the full House Financial Services Committee and on to the floor of the House of Representatives.