Bruce Billson (Dunkley, Liberal Party, Shadow Minister for Small Business, Competition Policy and Consumer Affairs) Share this | Hansard source

banking plan, and I am urged by those opposite to mention all the seven points in between! I will not go over all of them but I will come back to one of them in my later remarks. I will skip over those other compelling points, which show, I think, a really informed and insightful pathway to continue to ensure we have a strong, robust, viable and dependable banking sector.

I will jump down to point 8, and I do so drawing the parallel between what happened with the price-signalling bill, where it was up to the coalition to make the argument for that change, to show how it would be done by legislative drafting—very resourcefully done, given that the opposition has meagre resources—and to come up with a credible and effective legislative amendment that the government could then hook its wagon to. It presented something it claimed was better—only to find it did not understand it and had to make substantial changes to the government's bill when it came to this chamber.

We are here again. Back in October 2010, my friend and colleague the shadow Treasurer outlined the nine-point plan, and the eighth point was to commission a resolution to the debate about whether banks should be able to issue covered bonds in the same way other jurisdictions allow their banks to, which provides a more affordable line of credit. What that statement reflected was an opportunity that was not without a need to carefully weigh up and consider the various arguments surrounding covered bonds.

Covered bonds of themselves are not something that everyone, in uniform, cheers on as wonderful. That is because, as some colleagues have touched upon, they do in effect bring about a change in the hierarchy of people's ability to claim against an insolvent bank and basically put the covered bond holder above the depositor. That is a concept that challenges a number of people who have always approached the banking system where the depositor was at the pinnacle of opportunities to recover in the event of insolvency.

But this covered bonds idea did represent another way of bringing finance into our banking system, and that is why we felt it was important to have a resolution to the debate that had been washing around for some time. On 25 October 2010 the coalition said that was important, and my friend and colleague Joe Hockey explained why. Some months later, on 12 December, the Treasurer, Wayne Swan, in an echo of what the opposition had said, flagged the government's intention to allow the issuance of covered bonds in Australia.

This bill will amend the Banking Act to allow the issuance of covered bonds. This is necessary because the current Banking Act enshrines the notion of depositor preference at the pinnacle of the pecking order in the event of insolvency—that is, depositors are granted first priority on the entirety of an insolvent authorised deposit-taking institution's assets as secured creditors. The ADIs are authorised and regulated by the Australian Prudential Regulation Authority, APRA. This notion of depositor preference has, until quite recently, prevented the issuance of covered bonds for reasons that are apparent in the debate that we have just had.

So what are covered bonds? Covered bonds are a secured debt instrument with a dual recourse mechanism for bond holders. In the event that the ADI that had issued covered bonds actually became insolvent, the covered bond holder would have recourse to the covered pool—

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