Jamie Briggs (Mayo, Liberal Party, Chairman of the Scrutiny of Government Waste Committee) Share this | Hansard source

The Banking Amendment (Covered Bonds) Bill 2011 seeks to enable authorised deposit-taking institutions, ADIs, which includes banks, credit unions and building societies, to issue covered bonds for the first time in Australia. As the member for Wright just said in his very high quality remarks, this proposal was put by the shadow Treasurer on 25 October as part of a comprehensive approach to banking regulation. The eighth point of the shadow Treasurer's nine-point banking plan talked about allowing covered bonds to be issued in our jurisdiction. Thankfully the Treasurer decided last December that this was another issue he should pick up of the shadow Treasurer's proposals.

We welcome the government accepting this proposal. It is good to see the government adopt a reasonable proposal from our side, even though they will not publicly admit it, and not try to play politics. They tend to like to claim that everything we say and do is negative, but they are the most negative group of people you are ever likely to come across. We saw a perfect example of that last week when the Treasurer tried to spike his own tax forum by beating up a nonstory in a desperate, negative attempt to change the tenor of the debate. But I do digress.

The shadow Treasurer's proposals were comprehensive in their nature. This is part of that comprehensive approach. This is an important area in which to get reform right. We do not want governments intervening and regulating the banking system too much. At the same time the Australian public—consumers and investors—want to ensure regulation is there in the event that there are problems. In recent years we have seen a higher focus on some of those problems, particularly out of the global financial crisis that developed in the United States in 2008 and infected the world. It is important that we get this balance right. Since that time there has been debate across the globe about getting the balance of regulation right, particularly in the banking industry. There is a lot of money at stake and if there are problems it can have a major effect on people's lives.

Very quickly following the global financial crisis really breaking and the Lehman Brothers issues in September 2008, we saw the then Leader of the Opposition, the member for Wentworth, announce that Australia should have a bank guarantee. The backing level he proposed was well thought through. The government finally came to the party but did so at too high a level and did so with problems that are still causing issues throughout the system. However, it was obviously change that needed to occur because people needed assurance that their money was protected against these sorts of meltdowns. We saw the government take some action out of much of what was proposed by the member for Wentworth at that stage.

As speakers prior to me have stated, covered bonds are well rated products. In fact, the explanatory memorandum states:

Issuers of covered bonds generally seek a AA or AAA credit rating for the covered bond issue. Further, the rating of the covered bond issues is typically higher than the credit rating of the issuing ADI reflecting the dual-recourse nature of covered bonds and the high quality of the asset pool securing the covered bonds. In addition, many covered bond markets (particularly in Europe) are heavily regulated which has the effect of protecting the interests of covered bondholders, and supporting a higher-than-otherwise credit rating of covered bond issues.

This is not a new product around the globe. As the previous member mentioned, this product is being introduced into Australia. It is new to Australia, but has been operating around the globe for some time.

This bill will give authorised deposit-taking institutions the ability to seek more domestic sources of funding rather than relying on offshore markets for funding. That is a good development. That is a good thing. That is what the shadow Treasurer was thinking in his comprehensive approach to this last October, 12 months ago now. Covered bonds will mainly be used by the big four banks, although the bill does provide for ADIs to enter into aggregating entities to issue covered bonds. It is unlikely that smaller ADIs will use this funding facility. Nevertheless, any increase in domestic sources of funding for the financial institutions in our country and for the financial system is worth while. Thus, we are supporting what in effect is a coalition proposal.

In the event of insolvency, the holder has recourse to the pool of assets underpinning the bonds. Covered bonds are issued by financial institutions and are covered by a secure pool of assets. The value of the assets in the covered bond must be at least 103 per cent of the value of the covered bond. The holders of the covered bond have first rights to the pool of assets covering them ahead of shareholders and other holders of debt. That is an important element of the security involved. The rights of other holders of the debt are protected in two ways: firstly, the proportion of Australian assets that can be committed to the covered bond pool is limited to eight per cent and, secondly, the Financial Claims Scheme provides a government guarantee for all small depositors, currently limited to $1 million, reducing to $250,000 from February 2012. These protections are crucial because the introduction of covered bonds is a major departure from one of the core elements of the banking system in Australia, which has been the primacy of claims of depositors under the Banking Act 1959.

This is a good proposal and we will be supporting the passage of this bill through parliament. This is an area where we are conscious of the need to have the right amount of regulation in place. We do not want to see the government overregulate our banking sector, but we do not want to see the government underregulate it either and expose people and their money because it is vitally important for consumers—particularly home owners and depositors—that we have confidence in our banking system. While overregulation is attractive to some in this area, as in many others, to think that the government can save people from themselves or from catastrophe, we know that it does not happen and causes more harm than good most often. It is important in this debate.

The nine-point plan speech given by the shadow Treasurer last October was about getting the balance right in ensuring that the government's intervention in the market was well placed. It was there to provide competition; it was there to provide assurance to consumers and to investors that the market was well run and well-regulated. One reason we survived the GFC relatively unscathed was not only the hard work fiscally that the former Treasurer Peter Costello and Prime Minister John Howard did in ensuring we had money at banks and that we had no net debt, but also the reforms they implemented during their time in government to ensure our banking system remained strong and well-regulated and was not exposed anywhere near the extent that the United States and other countries were during the GFC meltdown.

While we undoubtedly learnt lessons during that time about where else we can ensure that we have stronger protections, ultimately the danger of the current troubles in Europe is that we are part of a global financial system. We are exposed when there are problems like those we saw in September 2008 and are seeing now in Europe, so we need to ensure that we have the regulatory balance right. The nine-point plan outlined by the shadow Treasurer gets that regulatory balance right. It is good to see that the Treasurer has picked up one of the elements of that plan. He should work constructively with the opposition more often and have reasonable debates about important policy issues. We do not often see that from this Treasurer.

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