THE federal government published draft legislation today that could allow domestic banks to issue covered bonds and help to diversify their funding base and bring down borrowing costs.
Under the draft, banks will be limited to holding 8 per cent of their total assets in the covered bonds.
Treasurer Wayne Swan in December gave the green light for covered bonds in Australia, a decision which requires a change to existing legislation ranking depositors above all other creditors.
Covered bonds are common in Europe but Australian financial institutions haven’t been able to issue them because domestic law requires banks to place depositors above all other creditors in their claims on assets.
Australia regulators have in the past expressed worries the bonds would subordinate depositors as they typically give the bond buyer recourse to both the issuer and the pool of mortgages or other secured collateral that stay on the bank’s books and “cover” the bond.
The biggest domestic banks have been driving a push to convince politicians to change legislation in the wake of new global prudential rules, known as Basel III, which require lenders to hold more high-quality assets on their balance sheet.
They say this type of debt would let them diversify their funding sources, lengthen their average debt maturity in line with regulatory rules, and increase lending competition.
