A bill introduced by Senators Kay Hagan and Bob Corker yesterday (Wednesday) has been welcomed for giving renewed momentum to a push for covered bonds in the US  – although a Hagan staffer gave no indication that FDIC concerns have been assuaged.

Democrat Hagan (NC) and Republican Corker (TN) and co-sponsors Democrat Chuck Schumer (NY) and Republican Mike Crapo (ID) are members of the Senate Banking Committee, the Senate body that proponents of the asset class have been hoping would take up the covered bond cause after a similar bill led by Republican Scott Garrett was passed by the House Financial Services Committee in June.

The Senate bill – like Garrett’s, called the United States Covered Bond Act of 2011 – is aimed at creating a legislative framework for covered bonds to expand the funding options of US financial institutions.

Senator Kay Hagan

“Our legislation has bipartisan support in both the House and the Senate, and I hope we will have the opportunity to advance it in order to benefit our financial system and ultimately the broader economy,” said Corker.

There had been fears that the Federal Deposit Insurance Corporation’s concerns regarding covered bonds and its lobbying against Garrett’s legislation might have dissuaded Senate Banking Committee members from moving forward.

Market participants said that they were pleased to see the bill being introduced.

“A few weeks ago we realised something was going to materialise in the Senate Banking Committee, but we thought that it might be a little bit of a token gesture,” said Ralph Daloisio, managing director, Natixis, and a member of the American Securitisation Forum who testified at a HFSC hearing in March. “But this looks much more choreographed – very closely mirroring what came out of the House Financial Services Committee and with four sponsors, all members of the Senate Banking Committee.

“It sounds like [Senate Banking Committee chairman] Tim Johnson is going to have to put it on the agenda.”

Daloisio said that the bill’s chances could be improved by the fact that, in a divided Congress, it is one of the few pieces of legislation that – as demonstrated by its HFSC passage – enjoys bi-partisan support and could be held up by politicians as an example of what they are doing to get credit flowing and support the economy and job creation.

“The only dark cloud is the FDIC perspective,” he said. “They are not very happy it’s come out in this way with the four Senators supporting it.”

A Hagan staffer told The Covered Bond Report that the FDIC had neither indicated support nor opposition to the bill, saying that the FDIC is always concerned about its repudiation and the treatment of assets in the event of a bank failure. He said that the Senators would work with the FDIC going forward, as well as Senate Banking Committee chairman Johnson, with a hearing on the bill being targeted.

“Now we have legislation in both the House and Senate with wide bi-partisan support,” he said. “That’s a rare thing in Congress these days and a good sign for the prospects of the legislation going forward.”

Bert Ely, a financial institutions and monetary policy consultant who also testified at the March HFSC hearing, said that although the Senate initiative is welcome, it might not move too quickly and further progress in the House of Representatives is probably necessary first.

“The fact that Garrett got his bill through the HFSC started to be something of an impetus to get the ball moving into the Senate,” he said. “It may still have to see the House floor first and if the House passes the bill that ups the pressure on the Senate.”

The Hagan staffer said that the bill would create a regulatory oversight framework and clarify the rights of investors in the event of issuer insolvency. He said that the proposed legislation is similar to Garrett’s, although there are differences including a broadening of the institutions that can issue to include broker-dealers and insurance companies.