If covered bonds catch on, they will magnify the losses the Federal Deposit Insurance Corp. suffers in the case of bank failures, thus exposing taxpayers to the risk of more big bailouts.
To put it bluntly, covered bonds wouldn’t reduce risk as much as transfer it from bond buyers to the
If some of the mortgages go bad, the bank must replace them with better ones.
A More Vulnerable FDIC?
FDIC Chairman Sheila C. Bair is aware of the threat of covered bonds to her insurance fund, so she has decided that the FDIC won’t allow covered bonds to exceed 4% of bank liabilities at first. Trouble is, that low ceiling prevents covered bonds from making a meaningful contribution to mortgage availability.