Allow Australian banks, credit unions and building societies to issue covered bonds

Date
The Government will amend the Banking Act 1959 to allow Australian banks, credit unions and building societies to issue covered bonds, to secure the long‑term safety and sustainability of our financial system so it can continue to provide reasonably priced credit to Australian households and small businesses.

A deep and liquid covered bond market will help to channel Australia’s national superannuation savings through the financial system into productive investment in all sectors of our economy.

The Government has carefully and methodically been consulting since early 2010 with our financial regulators, as well as industry and market stakeholders, on alternative frameworks for the introduction of covered bonds in Australia, to strengthen and diversify our financial system’s access to cheaper, more stable and longer duration funding in domestic and offshore wholesale capital markets.

The Government will release draft amendments to the Banking Act during the first sitting of Parliament in 2011, following targeted consultations together with our financial regulators, on details of a legislative framework which maximises the benefits for both sustainable access to funding and competition in the banking sector.

The future framework introduced by the Government for the issuance of covered bonds will ensure the security of Australian depositors’ savings and protection of taxpayer funds.

Australian depositors will continue to have absolute certainty over their deposits under the Financial Claims Scheme, which is a permanent feature of Australia’s banking landscape.

The Financial Claims Scheme also allows the Government to levy the banking industry to recover any taxpayer money used to pay depositor claims in the very unlikely event an institution fails and selling its assets does not recover taxpayer funds in full. This means Australian taxpayers will continue to be fully protected.

The Treasury will also consult on the appropriate level of cap to be placed on covered bond issuance for individual institutions, for example five percent of an issuer’s total Australian assets. This will ensure a substantial buffer of assets to cover depositor claims, making it extremely unlikely that a levy under the Financial Claims Scheme would ever be needed.

The Government is aware that there has already recently been an example of the successful issuance of covered bonds in Australia by an overseas issuer, and that many overseas jurisdictions including in Europe, Canada, New Zealand and the United States already allow covered bond issuance.

Industry consultations to date have indicated that the ability to issue covered bonds will strengthen the capacity of all Australian major and regional banks, credit unions and building societies to continue providing reasonably priced credit to Australian households and small businesses in the decades to come.