By Dave Clarke

WASHINGTON (Reuters) - A top U.S. bankingregulator Wednesday questioned the need for legislationintended to speed development of a covered bonds market.

Potential issuers of these bonds, including banks like Bankof America, argue that a legislative framework could boost themarket and provide a safer method for banks to raise funds andcredit to consumers for mortgages and other loans.

Covered bonds are debt securities backed by cash flows frommortgages but, unlike loans that are securitized, they remainon the issuer's balance sheet and thus are seen as safer thannon-guaranteed mortgage securities.

A vibrant covered bond market could relieve some dependenceon goverment backing from mortgage financiers Fannie andFreddie, but banks may be reluctant to keep the loan risk ontheir balance sheets.

Covered bonds have become part of the larger debate overhow to overhaul U.S. housing policies. They have been promotedas an alternative to government-backed mortgage funding and arewidely used in Europe.

But a limited legislative calendar and doubts about theneed for formal congressional action make it unlikely that acovered bond market framework law will be passed soon.

FDIC AT ODDS WITH INDUSTRY

A key to the debate is the FDIC's concern that legislationwould impair its ability to recover losses from its depositinsurance fund when it winds down a failed bank by allowingcovered bond holders to be treated differently than othercreditors.

"The essence is going to be the rub between the FDIC andeveryone else," said Republican Senator Bob Corker.

An official from the Federal Deposit Insurance Corp toldthe Senate Banking Committee on Wednesday that existingguidance from federal regulators may be all that is needed forthis market to thrive.

"Given the FDIC's existing statement of policy, theTreasury Department's companion Best Practices, and the priorsuccessful covered bond programs developed in the cooperationwith the FDIC, it is unclear that legislation is necessary tore-launch the market," said Michael Krimminger, deputy to theFDIC chairman.

Krimminger added that the agency "supports a vibrantcovered bond market in the U.S." and that it could get behindlegislation so long as it meets certain criteria such asensuring that taxpayers would not be on the hook to pay for anyfailures in the market.

An industry representative disagreed with FDIC's positionthat legislation may not be needed and pushed lawmakers to actsoon.

"Dedicated covered-bond legislation and public supervision,from the perspective of market participants, creates a degreeof legal certainty that regulatory initiatives just cannotreplicate," testified Scott Stengel, who was representing theSecurities Industry and Financial Markets Association (SIFMA),a group that includes possible covered bond issuers.

A representative from another U.S. banking regulator wasmore supportive of the push for legislation.

"We are encouraged by the continuing interest inestablishing a statutory structure for covered bonds in theU.S.," Julie Williams, chief counsel at the Office of theComptroller of the Currency, testified.

"Such a step, prudently structured and implemented, holdspromise as an additional, complementary funding source forfinancial institutions, and a catalyst for sound competitionamong the financial product funding alternatives available inthe U.S."

OBAMA HOUSING POLICY STILL TO COME

The Obama administration plans to unveil its housingproposal, including what to do with federally-backed Fannie Mae and Freddie Mac, in January and covered bonds may bedealt with in the ensuing debate.

Covered bonds, a top source of mortgage money in Europe,are modeled on German "pfandbrief" that date back to themid-18th century.

Before the financial crisis, the bonds were heralded byBank of America and Washington Mutual as a way for banks toretain control of mortgages they make and get cheaper funding.

But the nascent market sputtered as investors fled risk in2008, and remain wary of anything but the programs offederally-backed Fannie Mae and Freddie Mac.

Investors are thus demanding greater protections forcovered bonds, setting up a dispute over the claims of the"cover pool" in the event of failure at the issuing bank.

A bill sponsored by Republican Scott Garrett is pending inthe House of Representatives but given the lack of time on thecongressional calendar any legislation faces long odds of beingenacted this year.

Democrats promised to hold the hearing earlier this summerafter Republicans agreed not to try to force the issue duringfinal negotiations over the Dodd-Frank Act, the sweepingoverhaul of the financial regulatory framework enacted inJuly. (Additional reporting by Al Yoon in New York)