New bank rules on covered bonds

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.