Bert Van Manen (Forde, Liberal Party) Share this | Hansard source

The Banking Amendment (Covered Bonds) Bill 2011 ultimately seeks to make amendments to the Banking Act 1959 to enable deposit-taking institutions, which include banks, credit unions and building societies to issue covered bonds. This initiative is designed to increase the funding options available to Australian domestic deposit-taking institutions and it is designed to allow them to increase the amount of funding they can get from domestic sources and thereby reduce their reliance on offshore markets for funding. It is important to note that this bill reflects one of the components of the coalition's nine-point banking plan released in October 2010 to reform Australia's banking system. It is another example of the coalition's positive contribution to developing a strong and sustainable economic and financial framework for Australia's future. It is hoped that this legislation will help to level the playing field for smaller ADIs to enable them to have better access to capital to compete against the big four banks. It is important to note that any increase in domestic sources of funding for the financial system as a whole is worth while. It may provide additional portfolio options for the national wealth being accumulated in our growing superannuation pool.

The clear attraction of providing increased domestic sources of funding is that it reduces our reliance on foreign capital, thereby reducing our interest payments to foreign lenders and, consequently, retaining a greater share of our accumulated wealth onshore. Covered bonds are bonds issued by a financial institution covered or secured by a pool of assets and the value of these assets must be at least 103 per cent of the value of the covered bonds. In the event of insolvency, the holder of a covered bond has recourse to the pool of assets underpinning those bonds and the holders of covered bonds have first rights to the pool of assets covering them ahead of shareholders and any other holders of debt. The rights of other holders of debt are protected in two ways. Firstly, a proportion of Australian assets which can be committed to covered bonds is limited to eight per cent, which is largely in line with the current capital adequacy ratios for ADIs today. Secondly, the financial claim scheme provides a government guarantee to small depositors with a current limit of $1 million. However, it should be noted that this will reduce to $250,000 from February 2012. Whilst the coalition is not going to oppose this bill it is interesting to note the piecemeal process by which the government is going about reforming the banking sector. The Australian Bankers Association submission to the Senate inquiry into banking competition on 3 December 2010 stated:

The ABA supports this proposal. Covered bonds represent another source of term funding for banks. Having said that, we consider that the introduction of covered bonds should be part of a package of reforms aimed at addressing the cost and availability of funds in Australia.

For nearly 12 months now, the coalition has had a nine-point banking plan to reform Australia's banking industry. In summary it is as follows: giving the ACCC power to investigate collusive price signalling; encouraging APRA to investigate whether the major banks are taking on unnecessary risk in trying to maximise short-term returns that conflict with the notion of building sustainable long-term businesses which do not require taxpayer bailouts; formally mandating that the RBA publish regular reporting on a variety of key risk measures to ensure that Australian banks are not extracting monopolistic profits; investigating David Murray's proposal for Australia Post to make its 3,800 branches available as distribution channels for smaller lenders—and it should be noted that this is not about Australia Post assuming balance sheet risk and getting into the banking business itself; instructing Treasury and the RBA to investigate ways to further improve the liquidity of the residential and commercial mortgage backed securities markets, which is a significant alternative source of funding for our smaller lenders—and we also include in this consideration of a coalition proposal to extend the credit rating to AAA rated commercial paper in these markets to improve liquidity; exploring further simplification of the FSR Act to make the business of actually getting out and doing business easier and simpler; directing APRA to explore whether the risk weightings on business loans secured by residential properties are punitive and making it more difficult for small to medium business to obtain finance—and we also note that what this legislation refers to with covered bonds was raised by the coalition almost 12 months ago; and, finally, commissioning a full review into the Australian financial system.

As noted earlier, the coalition will not oppose this bill as it is based on one of our key nine-point banking reform plan points and reflects the coalition's positive contribution to public policy development. Overall I think this bill will go a long way to providing those additional funding sources that we need to broaden the base of our economy and banking system. I really hope that, through providing these additional sources of funding to our smaller banks, they can provide that additional level of competition we need in our banking system to give the Australian community more options and access to finance. As to whether it actually reduces interest rates, who knows at this point. We will need to see what happens in financial markets globally, in which there is a lot of turmoil at the moment.

One of the attractions of this, as I pointed out earlier, is that, by creating an avenue for more funding onshore, it starts to reduce some of that risk of us having to source at least 50 per cent of our private debt funding from overseas sources. So it reduces the risks to our economy because we are using more of our accumulated national wealth for our own economic purposes. As I said, we are not going to oppose this bill, because we think it is a step in the right direction. But ultimately we call for a full and comprehensive review of our banking system because this is just another piecemeal step. In reality, to get a comprehensive reform to our assist our economy we need a full review of the system.

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