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CNBC.com Henry Paulson |
"I believe covered bonds have the potential to increase mortgage financing, improve underwriting standards and strengthen U.S. financial institutions by providing a new funding source," Paulson said at a press conference on Monday.
Covered bonds, issued by banks and secured by pools of assets like home loans, are widely used in Europe but have only become attractive in the United States since the segment of the mortgage securitization market driven by investment banks dried up last year amid a wave of foreclosures.
The Treasury Department issued a set of so-called "best practices" for financial institutions that issue covered bonds.
The Federal Deposit Insurance Corp. has also offered guidance specifying how investors would get their collateral if an issuing bank fails. (See accompanying video of Q&A session)
Paulson said covered bonds were "a promising financing vehicle" and the market could be developed without any federal legislative action being required.
He said that Bank of America [BAC
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], Citigroup [C
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], JPMorgan Chase [JPM
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] and Wells Fargo [WFC
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] said they intend to establish covered-bond programs "and kick-start this market in the United States."
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