The Trump Effect (2)
19 Jan 2017 | Richard Kemmish
In my previous post I argued that for various reasons we
could see a resurgence in US dollar covered bond issuance by
non-US borrowers, particularly at the long end of the curve. In
other countries Australia springs to mind
opponents of covered bond legislation were won over by
precisely this sort of issuance. The Australian dollar
denominated deals by European issuers made many observers ask
why Australian pension funds were funding European homes when
Australia should have been an importer of funds. Maybe
something similar could happen in America? Clearly the fiscal
plans of the new administration put the US into the net
importer of capital group for the foreseeable future.
But this will be a minor consideration compared to the key
determinant of the success or failure of the covered bond
concept in America the fate of the government
sponsored mortgage lenders, Fannie and Freddie.
Received wisdom so far has been that whilst covered bonds in
theory have bi-partisan support, their alternative is mainly
favoured by the Democrats and that covered bonds will never
really work in America until the agencies role starts to
decline. Now that we have Republican control of both
houses and the presidency is it time for progress?
Seemingly yes. The new Treasury Secretary Steve Mnuchin has
said that the return of Fannie and Freddie to public ownership
is a top ten priority of the new administration. But actually
this was the stated policy of the previous administration also,
it just never happened. It is also significantly less extreme
than the opinions of several (Republican, natch) congressmen
who have called for the agencies to be wound down
Opposition to the privatisation / wind down of the agencies
invariably come from advocates of higher home ownership and
more affordable mortgages. Often it seems to be predicated on
the fact that there is no viable alternative which is an
interesting comment in the only country where securitisation
has actually recovered after the financial crisis. But looking
at private label securitisations in the US it is
clear that the European covered bond model is a far closer
substitute to the funding available from the existing
Could the passage of covered bond legislation address the
concerns of the opponents of agency privatisation? That would
be quite a conciliatory approach, perhaps at odds with the
tone of the new administration. But if the US
Covered Bonds act were to be proposed again, opposition to it
would presumably be weaker if the privatisation of the agencies
were going ahead at the same time.
The other consideration is whether covered bonds achieve
recognition under the Basle rules. The new
administrations rhetoric to date suggests that
international banking rules are unlikely to be particularly
persuasive in the domestic debate, but if they happen to align
with a top 10 priority, who knows?
Many of us have been wishing a US covered bond market into
existence for many years. Maybe this time?
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