Ms Julie Bishop (Curtin, Liberal Party, Deputy Leader of the Opposition) Share this | Hansard source

The coalition welcomes the debate on the Banking Amendment (Covered Bonds) Bill. I note that back on 25 October last year the shadow Treasurer announced on behalf of the coalition a nine-point plan to reform Australia's banking industry. This gives the lie to the government's claims that the coalition always says no. We oppose bad policies—of course we do—and this government has given us so much material to work with in that regard with bad policy after bad policy. We embrace good policy and we most certainly develop our own policies even though we are in opposition.

The coalition's nine-point plan is a case in point. Point 8 of our plan was 'to commission a resolution to the debate about whether banks ought to be able to issue covered bonds in the same way other jurisdictions allow their banks to, which provides a more affordable line of credit'. The government copied this idea—without attribution, as we have now come to expect—and in December 2010 announced the coalition's policy as part of its own package on a competitive and sustainable banking system. It has taken a while—almost a year—but we are finally debating the legislation.

Covered bonds are a financial instrument that will be used mainly, although not exclusively, by large banks. Formally, it will apply to banks, credit unions and building societies that are defined under the Banking Act 1959 as 'authorised deposit taking institutions', or ADIs. According to the explanatory memorandum to the bill a covered bond is a dual recourse bond or secure debt instrument issued by banking institutions, which in Australia are ADIs. The ADI issuing the covered bond has an ongoing obligation to make principal and interest repayments to covered bond holders—that is, the investors. The word 'covered' simply means secured—in this case by a pool of assets which represents at least 103 per cent of the bonds. In the event of insolvency the holders of covered bonds have first rights to the asset pool—ahead of shareholders and other holders of debt. In short, covered bonds should increase financing options for Australian banks, allowing them to increase the amount of funding they get from domestic sources. This will reduce the bank's reliance on offshore markets for funding. It will diversify the funding base. Hopefully, it will inject further competition into the sector, which will be to the benefit of financial customers.

There are, however, protections provided in the bill because the claiming rights of depositors are being changed. The two protections are that the proportion of Australian assets which can be committed to covered bond pools is limited to eight per cent, and the financial claims scheme will provide a government guarantee for small depositors, which is currently up to a limit of $1 million, reducing to $250,000 from February 2012. We support these protections.

Legal firm Blake Dawson, in an online note on 20 February 2009, said that in the past covered bonds were not looked on favourably by the regulators. They noted:

Australia has a relatively unique depositor preference regime. In particular, section 13A(3) of the Banking Act 1959 (Cth) provides that if an ADI becomes unable to meet its payment obligations, its Australian assets must be used to meet its deposit liabilities in priority to all other liabilities.

Covered bonds grant a first call over certain assets of an ADI, and covered bondholders would have priority over the ADI's assets ahead of depositors on a winding up of the ADI. It is predominantly for this reason that APRA has repeatedly expressed an in-principle objection to covered bonds and structures with a similar effect. In APRA's view (expressed, for example, in APS 120), "covered bonds are not considered to be consistent with depositor preference provisions set out in the Banking Act and hence are prohibited." More recently, in a letter sent to all Australian ADIs on 29 April 2008, APRA further stated that "other synthetic or structured transactions that are in economic substance equivalent to covered bonds will also not be acceptable."

However, on the urging of the coalition, views have changed. The Wall Street Journal online today quotes Australian Treasury sources:

… the legislative framework will allow Australian institutions to issue 130 billion Australian dollars (US$129.9 billion) of covered bonds in coming years.

It also notes:

Su-Lin Ong, the head of Australia economics and fixed-income strategy at RBC Capital Markets, said in an emailed statement to Dow Jones that the new law would provide offshore investors with a greater suite of Australian products to participate in and give Australian banks a broader investor group.

Covered bonds are likely to become an important part of Australian banks' funding tool kit, and the market will grow over time, she added.

Legal firm Clayton Utz—a firm I can personally attest has expertise in this field—in their online briefing of 13 December 2010 noted:

It has often been said that a covered bond is a corporate bond with one important enhancement: recourse to a pool of assets that secures or "covers" the bond if the issuer becomes insolvent. This enhancement typically results in the bonds being assigned AAA credit ratings by credit rating agencies

Clayton Utz went on to note:

One major advantage of covered bonds for investors is that both the debt and the underlying asset pool remain on the issuer's consolidated balance sheet, and issuers must ensure that the asset pool adequately secures or covers the covered bonds. In the event of default, the investor has recourse to both the asset pool and the issuer.

Finally, Clayton Utz noted that this:

… is seen as a step towards giving such Australian ADIs access to cheaper, more stable and longer duration funding in the wholesale capital markets. This is because the credit rating ascribed to covered bonds is often higher than that of the issuer itself, as covered bondholders have recourse to a segregated asset pool which the issuer is obliged to maintain in accordance with the asset coverage test. The offshore covered bond market has traditionally been accessed by highly rated financial institutions. It will be interesting to see whether the Australian covered bond market will evolve along similar lines.

The coalition is proud of putting forward this reform proposal and is particularly pleased that this generally anti-reform government has taken up our idea.

However, covered bonds were only one element of the coalition's nine-point plan. The nine points announced by the coalition in 2010 were: (1) give ACCC power to investigate collusive price signalling; (2) encourage APRA to investigate whether major banks are taking on unnecessary risks in a bid to maximise short-term returns that conflict with the preferences of those that backstop the system, namely taxpayers; (3) formally mandate RBA to publish regular, rather than irregular, reporting on bank net interest margins, returns on equity and profitability to determine whether major banks are extracting monopolistic profits—that is, whether taxpayers are effectively subsidising supernormal returns; (4) investigate David Murray’s proposal for Australia Post to make its 3,800 branches available as distribution channels for smaller lenders—to be clear, the coalition does not endorse Australia Post assuming balance-sheet risk and getting into the banking business itself; (5) instruct Treasury and the RBA to investigate ways to further improve liquidity of residential and commercial mortgage backed securities markets, which are an alternative source of funding for smaller lenders, including consideration of the coalition's proposal to extend the government’s credit rating to AAA-rated commercial paper in those markets to improve liquidity; (6) explore further simplification of the beloved Financial Services Reform Act to make getting out and doing business easier and simpler; and (7) direct APRA to explore whether risk-weightings on business loans secured by residential properties are punitive. The eighth point related to covered bonds and the last point, (9) commission a full review of the Australian financial system.

As I indicated previously, in its 12 December 2010 package the government picked up some of these points. It is a pity that the government does not take into account more of the coalition's policies. Nevertheless, we urge the government to adopt as many of the nine points in our plan as possible. In fact, with the dark clouds of the on-going global financial crisis still rolling in over the horizon there is simply no excuse for the government to ignore the need for further reform.

Instead, as we have seen today, the government have implemented one of the worst anti-reform pieces of legislation ever seen in this nation. The carbon tax will not help but will damage the Australian economy's ability to weather further financial storms. It is the ultimate example of the most incompetent government in Australia's history.

See this speech in context