Right now, only two U.S. banks, Bank of America and Washington Mutual, issue covered bonds.
Examples of secured funding include covered bonds, repurchase agreements and the European Central Bank's Long-Term Refinancing Operation.
The FDIC's action lets investors know how it would treat covered bonds, helping to establish a U.S. market for them.
Covered bonds have been popular in Europe for some time.
FORBES: House Committee Approves New Method For Financing Mortgages
The market for unsecured bonds has been closed for weeks, leaving banks with no option but to sell covered bonds at usurious interest rates that will challenge their profitability.
One key difference from the current system, which involves selling the underlying loans to Fannie Mae and Freddie Mac is that, with covered bonds, the loans stay on the balance sheets of the banks.
FORBES: House Committee Approves New Method For Financing Mortgages
As a result, growth of a covered bond market would lead to a corresponding reduction in Fannie Mae and Freddie Mac, although it is probably unrealistic to imagine a US mortgage market based solely on covered bonds.
FORBES: House Committee Approves New Method For Financing Mortgages
At issue was whether Railtrack's convertible bonds were covered by default protection.
In 2010, the Social Security system ran its first current account deficit since 1983, and for the first time since the reforms the deficit was covered by redeeming Trust Fund bonds.
Even so, dealers and hedge funds are quarrelling over whether two particular government bonds, maturing in 2018 and 2031, are covered by the default protection.
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