Toward a Better Mortgage Business
- Encourage banks to use "covered bonds" to fund – and hold onto – the fixed-rate mortgages they originate. Widely used in Europe, covered bonds have longer maturities than bank deposits and are on-balance-sheet liabilities. For example, a bank might sell $2 billion of five- and 10-year covered bonds secured at all times by $2.1 billion of high-quality mortgages and other assets. Those longer maturities would reduce maturity mismatching, which was the underlying cause of the U.S. S&L fiasco and more recent problems in the financial markets. The FDIC has begun to look more favorably upon covered bonds, but far too cautiously.
- Eliminate the double taxation of corporate dividends. This raises the cost of equity capital relative to debt, encouraging financial institutions to use excessive leverage to offset the high cost of equity capital. It also tilts banks toward securitizing assets into trusts not subject to the corporate income tax.