The Association of German Pfandbrief Banks, which is named after the longest-standing covered bond product in the world, has some advice for would-be U.S. issuers as they consider establishing a legal framework for a covered bond market here.

For example, Jens Tolckmitt, the association's executive director, suggests keeping the range of assets that may be refinanced under a covered bond simple. He said he feels one reason Germany's covered bonds proved to be such reliable performers and suffered relatively little damage in the recent global crisis was "the safety of the underlying asset."

The mortgage and public sector loans that back Germany's covered bonds are "safe and do not need a lot of explanation," Tolckmitt said. Covered bonds "could always be placed with investors" even during the height of market disruption from the Lehman Brothers bankruptcy, he added.

Tolckmitt advises there should not be a right to accelerate payments in insolvency proceedings if the United States' aim "is to create a product equally resilient." In Germany's covered bonds, there is no acceleration. Covered assets are taken out of the bank and are not part of the insolvency procedures.

"It lies at the core of the covered bond process that cash flows are not accelerated," Tolckmitt said. "The view of the FDIC seems to be that it harms the ordinary investor but if you want to have resilience in covered bonds, especially in pfandbriefe, you have to have that."

Tolckmitt said that in general he thinks the initiators of the legal framework in the United States "have done a lot of things right" and that their ideas appear to follow European trends in this area in many respects.

Before the crisis, a couple of U.S. lenders that were large players at the time experimented as issuers with U.S. covered bonds. But covered bond experts have long said the United States would need a legal framework to make more inroads in this area.

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