New bank rules on covered bonds

BANKS will be better placed to compete for funding on jittery global credit markets under new rules allowing lenders to issue covered bonds, Treasurer Wayne Swan says.

By InvestSMART · 16 Sep 2011

By InvestSMART ·
16 Sep 2011

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BANKS will be better placed to compete for funding on jittery global credit markets under new rules allowing lenders to issue covered bonds, Treasurer Wayne Swan says.

Mr Swan yesterday introduced legislation to give lenders another fund-raising option through covered bonds, saying the move would give banks access to cheaper and more stable types of capital.

Covered bonds are securities that give investors preferential access to collateral in the event of a collapse and are a rapidly growing funding source for banks looking to diversify from unsecured debt.

With global credit markets on edge due to Europe's debt crisis, Mr Swan said the introduction of covered bonds would strengthen banks' funding options and help lenders meet stricter capital rules from regulators.

"We have already seen banks from Canada and Norway coming to Australia to issue covered bonds and take our savings home with them. It defies logic that our own banks cannot issue the same covered bonds themselves to our local superannuation funds for Australian investors," Mr Swan said in Parliament.

Under the plan, banks will be able to raise no more than 8 per cent of their capital from covered bonds. This is well below caps of up to 25 per cent in Europe.

The major banks have strongly supported the use of covered bonds, with Westpac, Commonwealth and NAB all issuing the securities in New Zealand.

A spokeswoman for Westpac said the bank supported speedy passage of the legislation and was "looking forward to the prospect of being able to issue once a regime is in place". The other big banks declined to comment.

Although lenders support the move, it is expected to have a small effect on their cost of funding. More than $90 billion in Australian debt is due to mature next year.

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Frequently Asked Questions about this Article…

What are covered bonds and how do they work for investors?

Covered bonds are securities that give investors preferential access to a pool of collateral if the issuing bank collapses. They’re a way for banks to raise money backed by specific assets, which can make them a more stable funding source than unsecured debt.

Why has the Australian government introduced new rules allowing banks to issue covered bonds?

Treasurer Wayne Swan introduced legislation to let lenders issue covered bonds so banks can access cheaper, more stable capital, diversify funding options amid jittery global credit markets and meet stricter regulatory capital rules.

How much funding can Australian banks raise using covered bonds under the new plan?

Under the plan, banks will be allowed to raise no more than 8% of their capital from covered bonds—a cap that is well below some European limits, which can be up to 25%.

Will covered bonds meaningfully lower banks’ cost of funding?

The article says lenders support covered bonds but the move is expected to have only a small effect on their overall cost of funding, even as more than $90 billion in Australian debt is due to mature next year.

Which banks support or have experience issuing covered bonds?

Major Australian banks have backed the change. Westpac, Commonwealth and NAB have all issued covered bonds in New Zealand, and a Westpac spokeswoman said the bank supports speedy passage of the legislation and looks forward to issuing once a regime is in place.

Have foreign banks already been issuing covered bonds in Australia?

According to Treasurer Swan, banks from Canada and Norway have come to Australia to issue covered bonds, which was part of the rationale for allowing domestic banks to do the same.

What could covered bonds mean for superannuation funds and everyday investors?

The legislation could allow Australian superannuation funds and local investors access to covered bonds issued by domestic banks, rather than those securities being issued here only by foreign lenders, potentially keeping more investor savings local.

How do covered bonds relate to broader global concerns like Europe’s debt crisis?

With global credit markets on edge because of Europe’s debt crisis, the government argues covered bonds will strengthen banks’ funding options and help them comply with tougher capital rules from regulators, providing a more stable funding source during uncertain times.