Republican Congressman Scott Garrett bemoaned a breakdown in communication with the Federal Deposit Insurance Corporation as sharp differences with the regulator were made clear ahead of the House Financial Services Committee passing the United States Covered Bonds Act of 2011 yesterday (Wednesday).

The FDIC’s objections to covered bonds have been seen as a major roadblock to the development of a market in the US, and yesterday frustrations long felt by proponents of the asset class in the US spilled over into the public forum of the House of Representatives when a markup of the bill was held.

Democrat Barney Frank, former chair of the HFSC, tabled two amendments that would have given the FDIC more far-reaching powers than those in the draft legislation. Frank said that his first amendment had been drafted in close co-operation with the FDIC, which he said was concerned not with the concept of covered bonds, but the extent to which it and the Deposit Insurance Fund are protected.

Objecting to Frank’s arguments, Garrett pointed out that an earlier version of the bill that had contained less protection for the FDIC had been passed by the committee last year under the chairmanship of Barney Frank with bi-partisan support, including that of Frank.

Garrett went on to say that he noted that Frank had enjoyed “a positive working relationship and dialogue with the FDIC”, before saying:

“Would that it be the case that we had continued to have that relationship with the FDIC as well. I thought we had it for a long period of time and members on the other side of the aisle, their staff knows that we engaged in numerous hours of staff to staff discussions on various portions of the bill, but I will point out that that for some reason or another, despite those ongoing discussions that we were able to continue to have on a member to member and staff to staff member level here in the House, the FDIC, for whatever reason, decided to stop responding to our staff’s e-mails.

“So as of last week those aspects of discussions that we would want to have with the FDIC came to an abrupt halt. We were sending over e-mails as to what we thought we could do to improve the bill to make changes to address their concerns, and those ended at that point in time.”

Garrett went on to say that while he was pleased that member to member discussions could continue, he could not support Frank’s amendment because of what he said it would lead to.

“You would no longer have a covered bond marketplace,” he said. “There would not be any investors interested in the marketplace were this amendment to pass.”

He said that Frank’s amendments would introduce too much uncertainty into the instruments, such that investors would either not be interested in them or only at a price that would not make them viable.

He went on to point out several ways in which the different versions of bills he has introduced had progressively included more and more concessions to the FDIC over more than two years, “time and time again”.

HFSC chairman, Republican Spencer Bachus, also said that the committee had “tried very hard to accommodate the FDIC”, which had, he said, only the day before indicated that it had three problems with the bill that were being addressed.

Frank responded by acknowledging that there was a clear difference of opinion between the FDIC and those pushing for covered bonds. He said that those supporting the bill had “overestimated” the extent to which agreement with the FDIC had been reached.

Frank’s two amendments were defeated, although the votes were close, with both having 28 nays to 26 ayes.

Two amendments that offered concessions to the FDIC were nevertheless approved.

One, from Democrat Carolyn Maloney, co-sponsor of the bill, extends from 180 days to one year the period the FDIC has to find an institution to take over a covered bond programme in the event it is appointed conservator or receiver of a failed issuer.

Maloney said that the FDIC supported the amendment, which she said was designed to give the regulator as much flexibility as possible and to protect the Deposit Insurance Fund. The FDIC had argued that it is more difficult to sell off a covered bond programme than other banks’ assets and products, particularly if a number of institutions are failing.

An amendment allowing a covered bond issuer’s regulator to place a cap on covered bond issuance relative to total assets was approved. This was introduced by Republican John Campbell, who had expressed disapproval of the bill in a subcommittee markup in May but ultimately voted in favour of the bill yesterday.

He said that the possibility of including a number had been discussed, but that this would be left to regulators rather than legislated for. The FDIC has previously set a 4% limit.

The bill itself was passed by 44 votes to seven, with three Congressmen present but not voting for or against the proposed legislation.

The bill and amendments can be found here.