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Friday, April 12, 2024

FDIC holds off on longer guarantee for some bonds

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Facing objections from the Obama administration, the Federal Deposit Insurance Corp. has delayed a plan to stretch the term of the government guarantee for bonds issued by banks that are backed by mortgages and other collateral.

The FDIC in January proposed extending the guarantee to 10 years for the so-called covered bonds under a broader rescue program insuring hundreds of billions of dollars in U.S. banks’ debt. The current guarantee lasts three years.

FDIC Chairman Sheila Bair has said that covered bonds “can be a useful tool to help restore confidence and stability to the housing industry as well as to the mortgage finance system.”

But the agency has put the plan on hold while discussing possible revisions with Treasury Department officials, FDIC spokesman Andrew Gray said Friday. Treasury spokesman Andrew Williams didn’t immediately return a telephone call seeking comment.

The covered bond market is often viewed as a way to lower the costs and risks of mortgage financing and make it more available. It is still in a developing stage in the U.S. compared with Europe, where the bonds have been widely used to finance residential and commercial real estate, credit card debt and student loans.

The bonds provide funding to issuers such as banks, and are backed by mortgages or cash flow from other types of debt. If the bond issuer goes into bankruptcy, investors who bought the bonds can lay claim to the underlying assets.

Unlike the mortgage-backed securities whose collapse sparked the financial crisis, covered bonds remain on the balance sheets of the banks that sell them.

A 10-year guarantee period, while appropriate for mortgage bonds, may make less sense for shorter-term debt such as credit cards and student loans, banking experts said. The FDIC’s announcement in January mentioned consumer lending in general.

In the interim, instead of extending the guarantee to 10 years, the FDIC will expand the broader bank debt program to include a new type of debt called mandatory convertible that eventually must be converted into shares.

Regulators have said the FDIC’s debt guarantee program has helped ease the credit crunch by freeing up bank-to-bank lending. The government now is requiring major banks that received capital under the $700 billion bailout program and seek to return it to wean themselves off the FDIC debt guarantee program.

© 2009 Associated Press. Displayed by permission. All rights reserved.

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