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

That is very kind, Madam Deputy Speaker. For my colleague Mr Shorten, it might be quite instructive to know that this is based on some research I did back in April. If it is so sound that others have picked it up and carried it forward, I think that is a good sign. So I will go back to the work done in April, when we were doing what the government should have been doing—that is, canvassing opportunities to improve and enhance the banking system in Australia. If my comments have resonance with my colleagues, it might just show what clarity of thought has gone into the opposition's position.

I am sorry for those who were captured by the discussion prior to the interruption, but I was basically saying that, in the event that an ADI that had issued covered bonds becomes insolvent, the covered bond holder would have recourse to a cover pool of assets in the first instance and then to the remainder of the issuer's assets as an unsecured creditor. This would mean that depositors' claims under the Banking Act would effectively be usurped and, in front of those, would be claims of covered bond holders—therefore realigning that depositor preference that currently sits in the current law. That would explain why APRA and others have had some reservation in the past about the issuance of covered bonds. Essentially, it reprioritises access to those assets covered by the covered bond in the event of insolvency.

It would be fair to say that the incidents of insolvency of itself would represent a seismic shift in the banking system in Australia. So there would be much that would take place prior to such an event, which in many respects deals with some of the concerns that have been touched upon in terms of depositor interests in the broader assets of an approved deposit-taking institution. It is not as if an insolvency of a bank just happens and no-one notices; there is lots that goes on in the meantime. The guarantees implied or explicit provided by the Commonwealth, the proactive role of APRA, and the opportunity for other ADIs to become involved in working through any challenges that are faced are all natural actions that would take place prior to an ADI becoming insolvent.

So the concept of the insolvency of an ADI and the possibility of that occurring is something that we need to get our heads around and be quite realistic about. Given that there would be lots of supervision by APRA and lots of engagement by the Commonwealth and Treasury, the bond holders would be comforted not only that their investment is covered by a pool of assets but also that there is active prudential and supervisory effort on behalf of the regulators and the Commonwealth.

Some may ask why we would go down this path when there are other avenues available—residentially backed mortgage securities being one option and your more standard wholesale funding arrangement being another. But, as the explanatory memorandum points out, there are some advantages in having ADI access to covered bonds. It diversifies the source of funds that are available and may bring into the supply arrangements new investors that might otherwise not be attracted to investing in an ADI under wholesale funding RMBS or deposit arrangements. It gives a different structure to the way in which those deposits are paid. Usually covered bonds raise funds with a longer maturity and, throughout the life of that covered bond, the returns are paid and often the initial investment is paid at the end of that period rather than along the way, as happens in a number of other funding instruments.

It is also argued that it is one of the cheaper forms of wholesale funding, because the risk to investors is reduced as a result of the asset covered that accompanies the issuance. It is also a key opportunity for our ADIs to look at new avenues to secure finance. During the global financial crisis we saw that access to traditional funds for ADIs was constrained and also more costly. And I touched earlier on the repayment arrangements, where typically the principal is paid at the maturity date and a fixed-interest return is paid over the life of the instrument. This is quite different to other securitisation vehicles such as RMBSs, where typically there is a floating interest rate with the principal repaid in instalments over time. Some have cautioned about going down this pathway. For those who are gripped by the issue of covered bonds, there is a document of about 500 pages produced by the European Covered Bond Council.

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