The prospects for the passage of covered bond legislation in Canada and the US came into contrast at an ECBC plenary on Wednesday, with a Canadian official underlining the seriousness of the government’s commitment to pass legislation quickly while a US representative said the first covered bond under US legislation might not happen until 2014.

Khusro Saeedi, economist, structural issues, financial sector policy branch, financial institutions division at the Canadian Department of Finance, said that the high regard in which Canadian financial institutions are held was one of the reasons Canadian covered bond issuance has been so successful, with Toronto Dominion Bank last week having priced the largest ever dollar covered bond serving as an example of this.

“They have a reputation for strength, stability and conservative business practices,” he said.

Canadian banks have been issuing structured covered bonds since 2007, without having had the benefit of a legislative framework.

“Clearly they’ve had a lot of success with a contractual framework,” said Saeedi.

However, he said that when plans to introduce legislation were first announced the government had two factors in mind: that it is good for banks to have a variety of funding sources; and that legislation would improve legal certainty for investors, making it easier for banks to diversify their funding sources. He said legislation is “critical” for many market participants.

The Department of Finance in May released a consultation paper on plans to introduce a dedicated covered bond legal framework, after having in the 2010 budget included a commitment to introduce legislation. The normal next step following the consultation – which ended in June – will be for the finance ministry to put forward legislation in parliament, he said, adding that budget commitments were taken seriously and as such it could be expected to move forward quickly.

The consultation included a proposed cap on overcollateralisation as part of covered bond legislation, which market participants subsequently questioned. Saeedi said that there had been good feedback on this topic, suggesting that such a cap might more normally be dealt with in general prudential banking regulation.

November elections critical to US prospects

The Canadian plans contrasted with a more uncertain outlook for the fate of US covered bond legislation, with Ralph Daloisio, managing director, Natixis, and a member of the American Securitization Forum (ASF), saying that the prospects for legislation to a large extent depend on how it is viewed in the Senate.

Developments surrounding covered bond legislation in the US have predominantly centred on legislative proposals introduced by Republican Congressman Scott Garrett in the House Financial Services Committee. A latest proposal, the United States Covered Bonds Act of 2011, was passed by the committee by 44 votes to seven in June, a vote that Daloisio said was “a very encouraging sign of broad and deep bipartisan support”.

Ralph Daloisio

But hopes that the bill could reach the floor of the House of Representatives were “suffocated” by the debt ceiling crisis and election year politics, he said.

And the timeline and prospects for the passage of covered bond legislation depend in part on the outcome of November elections to the Senate, according to Daloisio, which he said was where the “real story” would play out with regards to covered bond legislation.

“That’s where we need to get more traction,” he said.

If the Republican Party gains control of the Senate then covered bond legislation could be passed in 2012, said Daloisio. But if the Democrats are in control, he added, then the more likely outcome is that “the covered bond legislative path slows even further, if you can believe that”. He cited 2013 as an “outside scenario” for the passage of legislation in this case, but with 2014 then possibly being the earliest time at which US legislative covered bonds could be issued.

“I’m an optimistic contrarian,” said Daloisio. “I’m optimistic that legislation will find a way on the fast track, but realistic that it may not.

“Tempering my contrarian optimism is the fact that we still haven’t adopted the metric system.”

He put the potential size of a US covered bond market at $320bn-$640bn (Eu231bn-Eu462bn), based on the availability of around $8bn of assets eligible as collateral, and an asset encumbrance limit of between 4% and 8%. Daloisio said that every bank would not necessarily issue covered bonds, but noted that over half of the $15tr of assets in the US banking system were held by the largest four players.

In the meantime non-US issuers continue to take advantage of demand for US dollar denominated covered bonds. Yesterday (Thursday) Nordea Eiendomskreditt sold a $1bn 2.125% five year issue at 120.88bp over US Treasuries via Bank of America Merrill Lynch, Citi, Credit Suisse, HSBC and JP Morgan. The issuer is a Norwegian [corrected from Finnish] unit of the Nordea group.