Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

I understand we were waiting for the member for Lyne. He has not turned up; so be it. We are debating the Banking Amendment (Covered Bonds) Bill 2011, which the government has introduced to enable authorised deposit-taking institutions to issue covered bonds. People who are listening to this broadcast or who are in the gallery have probably often thought about covered bonds. This is a significant initiative because covered bonds are a form of fundraising widely used by banks in other countries, including in Europe and New Zealand.

Martin Ferguson (Batman, Australian Labor Party, Minister for Resources and Energy) Share this | Link to this | Hansard source

You'd know about that.

Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

No; I was more involved in securitised assets and the residential mortgage-backed securities market all those years ago. Covered bonds provide an alternative source of funding for institutions. It is an important part of the range of fundraising tools that are available to financial institutions. Institutions have to raise money either through deposits or the issuance of bonds in global capital markets or domestically in order to lend money to Australians for credit cards, business loans, home loans or whatever the case might be.

There is bipartisan support for what the parliament is debating today. I suggested this more than a year ago. Like so many good ideas I have, the government has chosen to follow. We welcome the Treasurer putting aside for a brief moment his hubris and introducing a bill that follows our policy lead. I am happy to say that all of my ideas are open to the general public and even to the Treasurer to implement.

The bottom line out of this is that previously in Australia covered bonds were not permitted under the Banking Act. This bill will amend the Banking Act to allow banks, credit unions and building societies to raise funds by issuing these securities. I formally proposed this as part of my nine-point plan on banking, which was announced by the coalition in October last year. The Treasurer ridiculed the nine-point plan, as he is wont to do, but then picked up pieces of it and ran with it. We are quite fond of Swanny over here for a range of reasons, some of which I will go into. On this occasion he has shown some alarming common sense. I wish he would pick up the other pieces of my nine-point plan.

I will remind the House and the general public—and I can see those in the gallery are interested—of my nine-point plan on banking. The Treasurer has picked up two of the nine recommendations that I made. The first is giving the ACCC power to investigate collusive price signalling—that is, oligopolistic behaviour. I am glad the Treasurer picked that up after we introduced a bill. My colleague the member for Dunkley introduced a bill dealing with this matter, and then the Treasurer decided to introduce his own bill. It was a bit like the Parliamentary Budget Office. It was the same principle: we came up with the ideas and introduced a bill and then the Treasurer introduced his own bill.

The second recommendation was covered bonds, which I have referred to. But wait, there are more. There are seven other hurdles that the Treasurer can jump over to get a bronze medal in the 110-metre hurdle race in the Olympics.

Bernie Ripoll (Oxley, Australian Labor Party) Share this | Link to this | Hansard source

He's already got the gold.

Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

You should listen to this. Another recommendation is to encourage the Australian Prudential Regulation Authority to investigate whether the major banks are taking unnecessary risks in the name of trying to maximise short-term returns that conflict with the preferences of taxpayers. Effectively, I am saying that the moral hazard that now applies in the international banking system needs to be properly recognised. Of course, in the Wallis report the recommendation was that taxpayers no longer guarantee Australian financial institutions against risk. When HIH fell over I met with the board of APRA. I said, 'How are you going to handle this?' They threw their arms up in the air and said, 'The Wallis report considered this and said businesses will fail.' The second biggest insurer in Australia fails. I said, 'That is not good enough; it is unacceptable because it happened on your watch.' There were literally tens of thousands of people affected, and not just those with existing insurance claims, from people I knew who tragically had broken their necks playing rugby and were living off the annuities provided by HIH right through to people who had had their houses burnt down and were waiting on a payout. After a period of time it became clear that the Australian government had to step in—and we did with over $600 million—to ensure that the people whose insurance company they believed to be viable and well resourced was going to step up to the plate when they most needed it.

I remember the night when the provisional liquidator was appointed to HIH. I was standing in Lane Cove Plaza when I got a phone call to advise that HIH had just had a provisional liquidator appointed. I asked Graeme Thompson, the head of APRA, what this meant and he did not know. That was the thing that most alarmed me at that time. The prudential regulator did not know what it meant. Instinctively, having been a banking and finance lawyer, I asked how many people had car insurance with HIH and FAI. APRA could not answer. All of those people driving cars at that moment suddenly had no insurance—not even third party—and they did not know it. It was ridiculous. I asked how many builders had warranty insurance with HIH. APRA could not answer. All of a sudden, builders warranty insurance—remember that—closed down. The market closed down. I asked how many people who were travelling around the world and were no longer covered because FAI and HIH and all of the various subsidiaries that had provided travel insurance had had a provisional liquidator appointed knew that they were not covered. APRA could not answer.

It was a failure of the prudential regulator to understand the business that they were regulating that was most alarming. But, ultimately, the taxpayers are on the hook, whether we like it or not, and that was most graphically displayed during the financial crisis. We are rapidly entering into a phase where major banks around the world are either owned by governments or guaranteed by governments. The current European crisis involves potential sovereign debt default. When you consider the balance sheets of banks like BNP and their exposure to the sovereign debt of Greece, Italy and others, Societe Generale, Deutsche Bank and a number of other financial institutions in Europe—potentially UBS and Credit Suisse as well—you ask, 'Come on, guys, what is the exposure of the taxpayers to the risk involved in these products?'

More significantly, an issue that has not been properly assessed is the exposure of other banks around the world to derivative products based on that sovereign debt, whether it be a currency risk or some derivative product where the main holders of the sovereign debt have laid off some of the risk. Of course, they have primary risk, but should they in turn fall over in the case of a sovereign debt crisis the contagion impact through the derivatives market may be extreme. These are the issues that need to be properly assessed. That is one of the reasons why there is a significant endeavour in the United Kingdom by the Financial Services Authority and the government to separate out the retail banks from the investment banks. That in itself will raise significant issues and is not an easy process.

I wanted APRA, as the second point in my nine-point plan, to properly investigate the major banks in Australia to reassure the public. I do not think there is any reason to be concerned, but we need to ensure that short-term profit taking by Australian financial institutions is guided by the principles of proper risk management, given that we are now underwriting that risk effectively.

The third recommendation, which I regret the Treasurer has not taken up, is formally mandating the Reserve Bank to publish regular rather than irregular reporting on bank net interest margins and returns on equity profitability to determine whether the major banks are extracting monopolistic profits—that is, whether taxpayers are subsidising supernormal returns. I do not think there is any particular cause for concern again here, but I know the Reserve Bank does have irregular reporting in this area.

Mr Ripoll interjecting—

I am getting to it, don't worry. This is part of the package. Therefore, I think it would be a good idea to have a regular reporting mechanism. Fourthly, I suggested that we should look at using Australia Post's 3,800 branches as a more sophisticated distribution channel for smaller authorised deposit-taking institutions. Now, I have emphasised that Australia Post should not have a banking licence. It is not the role of government to get into banking, although this government seems determined to do so—whether it be Ruddbank, which was going to be a lender to the property industry, or Gillardbank, which is a $10 billion fund that is being set up as part of the carbon tax package. They love banks, the Labor Party, but they have a terrible record with them. Look at the State Bank of Victoria, Tricontinental, the State Bank of South Australia and Beneficial Finance; you guys have a terrible record. The Labor Party should keep well away from banks, let alone set up another one. That is one of the reasons why we think Australia Post would be a good distribution channel. David Murray actually suggested that originally, and I think it is a positive idea.

We obviously have supported the government in trying to make the residential mortgage backed securities market more liquid. For the people in the gallery, that is the market that originally helped to fund Wizard Home Loans, Aussie Home Loans and all those guys, because they are not deposit-taking institutions; they had to raise money on the bond markets and they used securitised instruments in order to do so. So they would get a pool of assets, home loans, and the pool would be properly diversified, and they would sell the bonds into the market and, in turn, raise the money that allowed them to go and lend more money.

That residential mortgage backed securities market was an important market in helping to create competition in home lending, and it was encouraging that they started to get into credit cards. Even though there are a huge number of credit cards and credit card products out there, this is a market that is an alternative source of funding, not just to keep the mortgage originators in play—well, not so much these days, but previously like RAMS, Aussie Home Loans, Wizard, Yellow Brick Road and so on—but also for smaller banks, enabling them to raise money. Even Westpac, I think, is involved in the RMBS market, and maybe some of the other major banks, as an alternative source of funding to bank deposits and the issuance of bonds into the global marketplace.

The sixth recommendation I made was to simplify the Financial Services Reform Act. This is an act that I introduced and I think it is hugely important. However, the Financial Services Reform Act was completely undermined by the onerous red tape that ASIC introduced into the process. It was overinterpreted, overanalysed and overlegalised. At the time, I was reshuffled into the small business and tourism portfolio so I missed the opportunity to see the full implementation of FSR, but I really regret that I did not ride shotgun on that process. So I would like to go back to that and try and simplify it.

The seventh recommendation directs APRA to explore whether risk weightings on business loans secured by residential properties are punitive. This is something that small business continually raise with me, and I think they are perfectly justified in doing so. I do not think there has been enough discussion about this matter. So many small businesses go and borrow money from banks and pay a premium—a significant premium at times, up to 200 basis points, or two per cent, above a home loan rate, because it is a small business rate; yet it is secured against their home. That is the security. Whether it is a home loan or a small business loan, it is the same asset for security. And it is the same income, the income from the business, that is going to make the repayments to the bank. Yet, if it is a small business loan as opposed to a home loan, it ends up being two per cent more expensive, maybe more, which is ridiculous. I think small businesses have a legitimate gripe about it and I do not think there has been enough said about that to date.

The final recommendation I identified was to have a full review of the Australian financial system, which I am absolutely determined to do and is part of the coalition's policy going forward. It is. The nine-point plan stands. The reason why we want a full review is that it is about 30 years since the Campbell review was commissioned by John Howard as Treasurer. It was a full review of the financial system which led to deregulation and greater competition in the financial system in the eighties. Keating claims credit, but it was John Howard who initiated the Campbell review and it was a hugely important review. Then it was Peter Costello as Treasurer in 1996 who commissioned Stan Wallis to undertake the 'son of Campbell' review, a full review of the financial system which, in turn, helped to design the Australian financial services industry and inoculate it against the challenges that were to come forward. For example, it allowed Australian financial institutions to diversify from simply banking into insurance and superannuation, even equities. Similarly, it allowed AMP as a life insurer—and general insurer, to a lesser degree—to diversify into banking and superannuation. It meant that there was this consolidation of the financial services industry so that banks in particular could not be accused of having lazy balance sheets, an accusation that was the great fear of the banks in the late nineties. In the case of Europe and the United States, it drove so many banks to engage in riskier behaviour, and that resulted, in part, in the contagion impact of the financial crisis.

But in Australia, even though financial institutions wanted to merge with other institutions—I well remember Westpac wanting to merge with DBS, but we would not allow it, and at the time that was a very wise decision—we were convinced that the aggregation and conglomeration of the Australian financial services industry ensured that we could better supervise a smaller number of institutions with a diverse range of products. But each product of course had its own product disclosure regime and, depending on how the product was sold—whether it was over the phone, face to face or through agents—different regulatory regimes applied, and that is when FSR came into play. This is the nine-point plan that represents coalition policy on banking. This bill is just one of the nine points. As I said, we would welcome the government supporting this initiative.

To be clear, covered bonds are attractive to investors because they are a very low credit risk. The bonds issued by a financial institution are secured or covered by a pool of assets. The legislation provides that the value of assets in the covered bond pool must be at least 103 per cent of the value of the covered bonds. In this sense, the bonds are oversecured. There is an argument that issuing covered bonds is expensive for the banks, but they are important as a diverse funding entitlement to the banks, particularly when there is the looming threat of a blowout in the cost of overseas money.

An important point is that in the event of insolvency the holder has recourse to the pool of assets underpinning the bonds—that is the difference. Depositors usually or almost always rank No. 1, ahead of everyone else, when it comes to a bank falling over—they have first dibs on the assets of the bank. Under this situation the holders of covered bonds have first right to the pool of assets that covers the bonds. This is a contentious aspect to the covered bonds bill, but the government has wisely limited the exposure of the banks so that they can raise only a limited amount of money in covered bonds as per their balance sheets.

Even though covered bonds sound similar to asset backed securities like the RMBS which I talked about, they differ in two crucial respects. The first is that asset backed securities are backed only by certain specified assets and the cash flows are linked directly to those assets. If those assets go bad, as happened in the United States with some mortgage backed securities, then the cash flows and value of the bonds commensurately fall. With covered bonds the pool of assets can be substituted; bad assets can be rotated out and good assets can be put in. Inevitably there will be some impaired loans that may be part of the asset pool from time to time, particularly if there is a slight economic downturn. Covered bonds are a good initiative in that the assets can be rotated. The other difference is that the covered bond debt and the underlying asset pool remain on the issuer's balance sheet. In the event of default, the investor has recourse to both the pool assets and the issuer.

These advantages mean that covered bonds carry lower risk than other secured investments. They also mean cheaper funding for financial institutions although the returns might not be as high as they might be, but the costs of funds are not as high as they would be for other instruments. I see this an important step forward in broadening the financing options for Australian ADIs. I recognise that APRA had deep reservations about this and I think even Treasury had some reservations, but this bill properly addresses those concerns.

Of course, covered bonds are likely to be mainly used by the four major banks in Australia because those institutions have the capacity to issue bonds in a size likely to be attractive to institutions. The government's bill appropriately does provide for smaller ADIs to enter into an aggregating entity to issue covered bonds. This means that two or more smaller institutions can join together to issue bonds over a combined pool of assets. This will help achieve a marketable size of issue that could not be achieved independently.

This leads me to current financial conditions which are important because the government, after doing nothing for the 12 months after I suggested this idea, came to us and said this needed to be dealt with urgently so that banks in the current environment can issue covered bonds to the market before Christmas. There has been an express concern about a dramatic blowout in the cost of funds for Australian financial institutions raising money in the international marketplace because of the sovereign debt crisis in Europe. European and, to some degree, American financial conditions have deteriorated in recent months. Obviously lenders are more risk averse and are looking at the exposures of banks and the asset quality of their counterparts.

Some European banks are now experiencing significant difficulty in raising funding in the wholesale markets. Large-scale recapitalisation of banks by European governments is looking increasingly likely. It is important to emphasise that Australian banks have not been directly affected by these concerns because their exposure to European sovereign debt appears to be low. However, any tightening in the global funding environment can indirectly impact on the availability and cost of funding for Australian banks, given their relatively high reliance on offshore wholesale markets. I understand that access to long-term funding markets in Europe through the issue of traditional banking instruments has become more difficult for Australian banks. In this environment it is prudent to broaden the funding opportunities available to Australian banks.

To reassure people that covered bonds are not a wildly new financial instruments, their first recorded use was in 1769 in Prussia. They have been widely used in Europe since then. In July 2008 US Treasury Secretary Paulson announced that the Treasury would take steps to encourage a market for these securities in the US to provide an additional form of fundraising. In June 2010, the Bank of New Zealand announced that it had launched the first covered bond program in Australasia. So we are quite late to the marketplace and that is perfectly understandable—we have always been cautious in moving ahead of others in relation to some of these areas.

Banking reform, as I said, is not yet finished. There is much to do in banking reform and it is an ongoing area of challenge. The reason that I do want a granddaughter of Campbell or a son or daughter of Wallis is because Australia deserves to have the very best financial system in a part of the world that is increasingly complicated but also, importantly, increasingly competitive. The lesson out of both Campbell and Wallis was that we prepared for the next round of challenges. That is what happened. This government has a history of calling for reviews, summits, working groups and everything and not accepting the recommendations and not implementing them. Just look at Henry, the 2020 Summit and so on.

Our commitment is to follow a process very similar to Campbell and Wallis in that you have the private sector looking at the challenges for the financial system on a global basis, recognising those challenges, and preparing a suite of initiatives that allow us to innoculate Australia against some of the volatility that we are going to see in the financial system for the next 15 to 20 years. Let's be fair dinkum. The financial system globally is going to be volatile. Capital markets are going to be volatile for the next 10 to 15 years until the debt challenges of Western nations and the trade imbalance across the globe is properly resolved. Therefore, let's be fair dinkum about inoculating the Australian financial system. All wisdom and knowledge does not come through the air conditioning here in Parliament House, down at Treasury or anywhere else, it has to come from those people involved in the industry day to day. Our commitment to considered, balanced further reform in banking is undiminished and this is a good step forward which the coalition as the initiator of the idea is happy to support.

Bernie Ripoll (Oxley, Australian Labor Party) Share this | Link to this | Hansard source

What an extraordinarily long contribution for such a simple set of proposals and changes as are in the Banking Amendment (Covered Bonds) Bill 2011. Anyone listening would have understood that it was more of a history lesson and the shadow Treasurer acknowledged that it was a history lesson but with an interesting twist. It left out 12 significant years of the Howard government. It is as if, in financial services and banking and financial reform, the world only began in 2007 when Labor was elected—that was when all the work had to be done. The coalition says: 'Why hasn't the government done this? Why hasn't the government listened to me?' They blame ASIC, they blame APRA, they blame the ACCC, they blame all the states but there is this convenient gap, a 12-year gap, in the history of the shadow Treasurer's nine-point plan. Where was the nine-point plan for more than a decade? Was it just sitting in the bottom of his drawer? Was it conveniently not accepted by his own party? Where was it for all those years?

Thank you very much to the shadow minister for coming in here and entertaining people with a great history lesson. As he leaves the chamber I thank him very much, but he spent very little time addressing the key points of what is really good about this bill. It is nice to have the coalition's support on at least something acknowledging the good work that the Treasurer and this government have done in making some necessary changes as they are needed in this country to deal with a set of circumstances that we have found ourselves in, particularly after the global financial crisis.

This bill amends the Banking Act and allows Australian banks, credit unions and building societies to issue covered bonds. Covered bonds are a debt mechanism, they are a debt security backed by cash flows from either mortgages or public sector loans. They are quite a safe mechanism and something that is well supported. Treasury estimates that this will allow Australian institutions to issue something in the order of $130 billion of covered bonds in coming years. That will strengthen and diversify the Australian financial systems' access to cheaper, more stable and longer term funding not only in our domestic but also in our offshore wholesale capital markets. This is really significant and it is really important because covered bonds are well established already overseas and they are well understood. They are one of the most resilient funding markets and that was very evident during the global financial crisis. What is really welcome here though is that during the financial crisis it was foreign banks as well as a range of other things that actually helped to underpin our financial system. They did it through covered bonds and that same opportunity should be available to Australian banks. They should also be allowed to issue covered bonds in similar conditions, particularly to our local superannuation funds.

Covered bonds will also assist our banks in meeting our Basel III liquidity reforms and are an important step forward in the continuing reform, the continuing development and the continuing support that this government has provided the banking system. In turn what that actually means is support for consumers, for the clients of banks.

This bill also contains an express framework to allow smaller lenders to pull together and jointly issue covered bonds. It is about providing an understanding that flexibility is needed in this market, that it is not just about the big four, that there are groups of smaller banks, smaller lenders, approved deposit-taking institutions that can actually work together to provide those same facilities.

We want to make sure that the consumers are protected. This was not just a case of coming out and saying that we are going to allow this mechanism. Even though it is well understood, even though it is a safe mechanism and it is covered by cash flows, we want to make sure that consumers and depositors are protected. This bill includes a regulatory cap on the amount of covered bonds an institution can issue. There needs to be that safety mechanism in place. The cap will be set at no greater than eight per cent of an institution's assets in Australia. Additionally, depositors will continue to have certainty over their deposits under the financial claims scheme.

When this government announced the financial claims scheme we made sure that people would have certainty and safety about their deposits. I think it is pretty safe to say that all Australians when it comes to a bank have an image in their minds that, when they have put their money in, at any time that they want they can go to the bank and take their money back out. That money is there, it is held safely and it is accessible. As a government, we want to make sure that actually is the case—that it is backed.

The government has recently announced that the financial claims scheme will have a $250,000 per person per institution protection mechanism from 1 February next year—2012. This will protect the savings of about 99 per cent of Australians' deposits in full. In the unlikely event though that you actually needed to use this particular facility, and in the even more unlikely one of the sale of a failed authorised deposit-taking institution where their assets could not cover depositors' funds in full, then the financial claim system will allow the government to levy the banking industry and to recover the outstanding amounts. The bottom line for depositors is that your money is safe; that is an important understanding to have.

This bill is another essential reform in the Australian banking industry. It continues the government's commitment to greater competitiveness and a sustainable banking industry for all Australians. The government, for example, has banned mortgage exit fees quite simply because they were just bad. They were bad for customers and they were bad for consumers, particularly consumers that wanted to switch loans to cheaper loans. Mortgage exit fees, for the majority of people, actually prevented them doing that. We have banned those; we want to make sure that there is true, fair and open competition in the banking system.

The legislation introduced will also help customers. We have introduced legislation to make sure that customers can actually compare loans. I think one of the biggest issues for many people is that when you try to compare apples and oranges and bananas at banks it is all just a little bit too difficult to actually see where the value proposition is. What sort of value am I getting for the interest rate that I am being charged? We have introduced the provision of a simple one-page fact sheet for consumers to help them to compare loans. You actually can compare down a sheet and say, 'Okay, the rates might be slightly different but there is an advantage, maybe, with paying a little bit more interest rate than there is with going with the slightly cheaper loan'. We have made sure that consumers can understand that in its simplest form.

We have also instituted reforms to protect credit card consumers and to save them money. This is in the way you pay your credit card and where those payments first go. They should go to your highest interest rate periods and debt first, rather than coming off the cheaper end of the credit card. These are all little changes, but really important changes for ordinary consumers trying to save some money and to get better value.

We are making it easier to switch deposit accounts. We are also building a fifth pillar in the banking system from the combined competitive power of our mutual sector organisations. We have also boosted the government's investment in AAA-rated RMBS by $4 billion, which is helping smaller lenders to secure cheaper funding. That transfers; it means that more money is available in the system for when people want to borrow money to buy a house. One of the biggest problems we are facing today is when people genuinely can afford a loan but cannot quite meet the requirements because liquidity is tight—because cash is tight. By providing these extra funds through the RMBS—an extra $4 billion—that money will be available to young families trying to buy their first home.

The government's reforms in this area are having an enormous impact, and we are having that enormous impact in four years not 12. Particularly following the global financial crisis, where tough decisions had to be made, we needed a government that would actually take action; not just talk the talk but walk some of it as well. Banks are now more competitive than ever, and this means there is more choice in products as well as more choice in banks. This can only be good for consumers because they can choose with their feet. You can walk, you can go from one bank to the next. Your loyalty ought to be based on their loyalty to you, not the other way round.

This bill continues the government's reforms, and will ensure that our financial institutions will have the capacity to lend safely for many years to come. I commend the bill to the house.

Andrew Robb (Goldstein, Liberal Party, Chairman of the Coalition Policy Development Committee) Share this | Link to this | Hansard source

I rise to speak today on the Banking Amendment (Covered Bonds) Bill 2011. This bill amends the Banking Act 1959 to enable authorised deposit-taking institutions, including banks, credit unions and building societies, to issue covered bonds.

This proposal allows complying ADIs to raise a relatively small portion of their total funds by the issuing of covered bonds up to a limit—as the previous speaker has said—of eight per cent of the total value of the institution's assets. It will provide greater flexibility by increasing financing options for domestic Australian deposit-taking institutions. This will go some way to reducing their exposure to volatile overseas markets.

The proposed use of covered bonds is supported by the coalition, in part because the member for North Sydney first raised it back in October 2010. We have had a long interest in the role that covered bonds may take, certainly in the uncertain international financial climate that we face and given our dependence as a financial sector on wholesale funds from credit markets overseas. The government has lifted this idea, if you like, from the coalition's competitive and sustainable banking system plan. Covered bonds will increase the scope of ADIs to source funds domestically and will reduce their reliance on offshore markets for funding.

There will be an increase in domestic sourcing of funds because the wholesale price will in all likelihood be cheaper using the covered bonds than trying to access funds on international markets. Covered bonds are likely to be mainly used by the big four banks, although the bill does provide for ADIs to enter into an aggregating entity to issue covered bonds. This gives some scope to the smaller institutions to be involved in this market. Nevertheless, it is unlikely that the smallest ADIs will use this funding facility. Any increase in domestic sources of funding for the financial system as a whole, though, is certainly worth while. In the specific case of conventional bonds issued by a bank, Australian law has always required that the bank's depositors have the first claim on the remaining assets of the institution in the event that it fails and that they rank ahead of bond holders. Compared with the traditional claim by depositors on all assets with conventional bonds, the key feature of the covered bonds is that they entail the issuing bank setting aside a pool of assets specifically to back the bond, with this asset pool required to be topped up periodically as needed if the value of the assets in it falls. The value of assets in a covered bond pool must be at least 103 per cent of the value of the covered bonds. In the event of insolvency, the holder has recourse to the pool of assets underpinning the bonds and covered bond holders have first claim on these assets over other depositors. That is the key difference that has been introduced.

Despite that preference now being given to covered bond holders, having first claim on the assets of any institution that might fail, the rights of other holders of debts are protected in this bill. Firstly, the proportion of Australian assets which can be committed to the covered bonds pool is limited to eight per cent. That is a very important component, as we are seeing at the present time in Europe, given that there is a capacity and has been for a long time, as I understand it, to issue covered bonds. What is happening at the moment is that many of the financial institutions, given the parlous financial state of the credit markets in Europe, are issuing covered bonds which are simply being bought by other banks. It is becoming a very circular activity and, in many respects, further undermines confidence and the prospect of the European financial system finding an answer to the crisis that currently confronts it. So it is quite important to put a cap on the proportion of funds that banks can hold which are made up of covered bonds.

Secondly, the Financial Claims Scheme provides a government guarantee for small depositors, currently up to a limit of $1 million and reducing to $250,000 from February 2012. As a last resort, there is a measure where the government could levy the financial sector to protect the depositors in any failed institution. So, on a number of accounts, the longstanding preference given to your normal depositor is protected, I feel, in this bill. Unfortunately, during the global financial crisis this government botched the handling of the government guarantees—that is, the $1 million government guarantee on depositors, which is in the near future to be reduced to $250,000. By providing that guarantee initially to the four big banks we saw a rush of depositors' money flood out of smaller ADIs, regional banks and building societies. We saw some very longstanding and reliable trust funds find that they had a rush on the deposits that they held.

As a consequence, the position in the market, quite contrary to what the previous member has claimed—that there is an increase in competition—is that the opposite in fact happened. The botched use of the guarantees led to the big four banks having a massive increase in their deposits, all at the expense of other financial institutions, and it added further pressure for the amalgamation of the St George Bank that would never have happened outside of the global financial crisis. It has further diminished the competition and further enhanced the position of the big four banks. The government loves to belt the big four banks, but I think it was hoodwinked on this occasion. There was a sense of panic running through the government and on a number of measures, including of course the extraordinary and massive spending that went on as a consequence. In this instance it has materially improved the market power of the big four banks by the way in which it botched the handling of the guarantees.

The government was not satisfied with just giving a preference to the big four in the first instance. We have now seen so many small institutions, particularly some of the trust funds which had been specialising in small and medium business financing for 50 years—they had been around forever, had been very reliable and had very deep experience in the way in which they serviced particular parts of the market—disappear; they have gone forever. In some cases, people are still waiting and still have their deposits frozen. Here we are, some years after the global financial crisis but, because of the way in which the government panicked, gave preference to the big four banks and saw a rush on all of our smaller financial institutions, we still have people who cannot access their own savings. Their funds are still frozen in a number of institutions. So we now see continued tinkering with the guarantees and, again, I think it is going to disadvantage the smaller players in reducing it, as is in prospect, from $1 million down to $250,000.

The big banks have an implicit guarantee already because they are too big to fail. In fact, the government really inferred that by the preference given to the big four banks during the global financial crisis. The government inferred that these banks are too big to fail. Most people would deposit money in all of our big four with that assumption. Those with investments which exceed $250,000 will see no advantage in keeping their accounts with the regional institutions, and I refer particularly to, say, local government. So many local governments have placed money in local regional banks in order to support their local industry and, in this case, their local banks. They might have $600, $700, $800, $900 or $1 million deposited in regional banks. Now, with the reduction of the depositor guarantee to $250,000 and with the big four banks being too big too fail, we are going to see the credit unions, regional banks and smaller players again materially disadvantaged. Their customers and others will walk from them, which is understandable because they will seek to take advantage of the extra layer of implicit guarantee afforded to the big banks.

The other issue, of course, is that when the government provided that million-dollar guarantee it imposed a fee, which was not unreasonable. But the fee for the big banks was 70 basis points cheaper than it was for the smaller institutions. So on several counts during the global financial crisis the position of the big four banks was materially advantaged by the government's actions. There is no case if you are providing a positive guarantee. We were talking about a risk factor, but with the deposit guarantee there is no case for discriminating between the different financial institutions as they have done. It is still unclear what the government will do with the cost in the case of the $250,000 deposit guarantee, but I urge the government to consider not disadvantaging the smaller institutions, because they have already been put under enormous pressure in trying to access funds to keep their activities and their ability to compete with the big banks going.

In relation to covered bonds there is an expectation that investors in this class of asset will be satisfied by a lower interest rate than they would demand for a conventional bond given the greater security they are provided. For this reason covered bonds are often argued to be a way in which banks would be able to raise funds more cheaply and therefore, it is suggested in turn, lend at lower rates. The use of covered bonds as outlined by this bill will positively increase the product range offered by ADIs. It will also cater to a class of investors who would not otherwise consider putting their money into Australian bonds but who might do so if covered bonds with their more secure characteristics were available. In theory the allowance of covered bonds will increase the total supply of funds in the market and certainly the total supply of funds sourced locally, thereby reducing borrowing costs and in turn reducing Australia's exposure to needing to borrow wholesale funds on international credit markets.

There is no doubt that international credit markets will come under increasing pressure. In my view, funds will be dearer over the next few years as Europe seeks to grapple with their massive sovereign debt problem. In particular, the idea that the use of covered bonds by banks would allow them to hold their standard variable home rates lower than otherwise has been put forward in the media as one of the key benefits such bonds would bring were they to be permitted in Australia. While this may be right, I think it should not be overstated. As the RBA has noted, to the extent banks have to commit high-quality assets to back any covered bonds they issue, the average credit quality of their remaining assets will be commensurately lower. Hence the rate lenders will presumably demand for the ordinary bonds that banks issue to obtain the rest of their funding will likely be higher than otherwise, offsetting the lower rates the banks can expect to have to pay on their covered bonds.

Covered bonds are not a panacea, but properly managed they contribute a useful addition to the suite of financial products available to be offered. As such, the coalition supports the bill. (Time expired)

Adam Bandt (Melbourne, Australian Greens) Share this | Link to this | Hansard source

I found myself nodding in agreement through much of the speech of the member for Goldstein, which leads me to wonder why the coalition will not be joining the Greens in opposing this bill. The effect of this bill is enormously significant. There have been some historic votes taken in this place this morning that have rightly gained significant attention in the media. It is disappointing that on the same day we are about to change a fundamental element of the Australian banking system that it does not attract the same level of scrutiny. Fundamentally, today, after this bill passes, depositors will lose top spot when it comes to protection of their deposits in banks. This is a fundamental point that should be on the front page of newspapers because it is significant.

It is said that that will be okay because the government through the Financial Claims Scheme will step in and protect depositors. There are two points. One is that all that is effectively doing is shifting the risk that is currently borne by the banks onto the taxpayers. It is shifting it onto the taxpayers without any recompense from the banks to the taxpayers. In other words, what the banks who are able to issue these covered bonds will get is a reduction in their risk with the government and the taxpayers effectively picking it up for free. Not only that; as the member for Goldstein pointed out, there will also be a class of depositors who have deposits over the amount guaranteed by the Financial Claims Scheme, which may drop to $250,000, who will now permanently in respect of that amount be knocked off the top spot. In other words, if a bank ever goes under, a covered bond holder will be able to front up and say, 'I want you to pay me in respect of my claims before the claim of an Australian who's got more than $250,000 in that bank.' That is something that should be attracting the attention of everyone in this country.

It also said that it will allow banks to access a cheaper source of funding. It will only allow the big banks to do that. The smaller banks have been very clear that the covered bond market is not one that they consider they will be able to access. They have explored perhaps pooling their assets and going together with a number of banks to access the covered bond markets and have basically said it is impractical and will not be doable. In other words, yes, there will be a cheaper source of finance available because it is underwritten for free by the taxpayer; but it will only be the big banks who are able to access that cheaper source of financing. What that is going to do in turn is make the lower ranking securities in that bank—the other sources of finance—potentially more expensive as they now become riskier, knowing that covered bonds are going to sit ahead in the queue of other forms of instruments.

It is said that we ought to feel some comfort because only eight per cent of the bank's assets will be able to be in covered bonds. I note with interest that, if my memory serves me correctly, at the time the government first floated this as an idea the figure they were considering was somewhere around four or five per cent. Obviously, the big banks have got in in the meantime and said: 'Well, no, that's not enough; we'd like a bit more, thank you. We'd like up to eight per cent of our assets guaranteed by the taxpayer at no charge to us.' And they have got it.

This comes at a time when smaller institutions have been making the complaint in the media and elsewhere that the promised support to them from the government has not been forthcoming in the way that it was proposed. In other words, we have here yet another measure that is going to make the market dominance of the big four banks that much easier to hold, because they will be able to access a cheaper source of funding with taxpayer support that other banks will not. It is going to add to the concentration of assets in the Australian banking industry at the top end without any countervailing measure on the other side. It is no wonder that at the moment the Australian banking sector is at its most concentrated for a hundred years and this bill is only going to entrench that. When one looks at the nature of the security one sees it is obviously a security that is underpinned by charges over houses. In other words, what we are about to see is a massive expansion of overseas borrowing to fuel the domestic property sector at a time when other sectors of the Australian economy talk about how it is increasingly difficult to find finance. One wonders why it is that we think now is the time to give free support to the big four banks to go and expand the domestic property sector. We do have, as others have noted today, a too-big-to-fail policy with respect to the big four banks and this is another pillar of it.

The view of the Greens is that we should call a spade a spade. If we are going to have a too-big-to-fail policy, and if we are going to be providing support to these big four banks that allows them not only to get through the financial crisis but also to increase their profitability and increase their market dominance after the financial crisis at taxpayer expense, then we should be asking them to give a commensurate response to the taxpayer: to make a contribution in the form of a too-big-to-fail levy if we are going to continue to provide this support. As the member for Goldstein pointed out, it is not only that we do not ask for a levy but also that, when you look at the wholesale funding guarantee, for example, we give the big banks a leg-up. We have said to the big banks: 'Yes, we will give everyone access to wholesale funding but we will make it cheaper for the big four banks,' and then we wonder why at the end of the financial crisis it turns out that they have increased their market share.

The Greens will not be supporting this bill and I will be asking that our dissent be recorded. This is a day when the Australian depositor gets knocked off the top spot and the public is asked to bear an enormous share of risk simply so that the big banks can access finance cheaper and we get nothing in return. There will come a day when depositors who have amounts over and above that guaranteed by the financial claim scheme find that they are no longer able to have first claim on a bank's assets and this bill will be the reason, and for that reason we do not support it.

Bert Van Manen (Forde, Liberal Party) Share this | Link to 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.

Ms Julie Bishop (Curtin, Liberal Party, Deputy Leader of the Opposition) Share this | Link to 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.

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

The Deputy Leader of the Opposition must be relevant to the bills before her and I would bring her back to the bills. I have given a great deal of latitude. I will give no more.

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

The fact is that the government simply does not appear to take heed of the warnings that are coming from overseas. The most stark and chilling of these recent warnings have been those of the Governor of the Bank of England, Sir Mervyn King. Last week he stated:

This is the most serious financial crisis we have seen at least since the 1930s, if not ever, and we are having to deal with very unusual circumstances but react calmly to this and do the right thing.

In essence Sir Mervyn is warning that the current world financial crisis is possibly worse than the 1930s. These are sobering statements that the Treasurer and the Prime Minister do not appear to be heeding. Covered bonds reform is a step in the right direction; however, these reforms are overwhelmed by antireform actions like the carbon tax and the mining tax. They are overwhelmed by the anticompetitive NBN proposal, which the—

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

The member will resume her seat.

Bill Shorten (Maribyrnong, Australian Labor Party, Assistant Treasurer) Share this | Link to this | Hansard source

What about relevance?

Mr Lyons interjecting—

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

The member for Bass is not assisting. The minister at the desk is not assisting. I can see where this is going with the list of speakers before us. I have given a great deal of latitude. Either the Deputy Leader of the Opposition will refer to the bills or I am going to sit her down.

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

The financial stability of Australia relies crucially on the financial stability of the federal government. The government must lead by example and secure its own finances. The coalition welcomes this bill and is happy to support its passage. However, it is not enough. It is nowhere near enough to meet the massive economic challenges facing Australia today and into the future.

Josh Frydenberg (Kooyong, Liberal Party) Share this | Link to this | Hansard source

I rise following my colleague and friend the member for Curtin to also support the Banking Amendment (Covered Bonds) Bill 2011 to enable authorised deposit institutions—ADIs—including banks, credit unions and building societies, to issue covered bonds. In doing so, I am very pleased that the government is following the lead of the coalition in introducing the issuance of covered bonds, one of the key points in our nine-point banking plan.

What is a covered bond? I look to a very good speech by John Lonsdale, of the Markets Group in Treasury, which he made in August this year. He said that the characteristics of covered bonds seem 'straightforward and widely accepted', but in fact in particular countries they can be different. He said:

As defined by the European Covered Bond Council, covered bonds have four essential characteristics:

Covered bonds allow banks to diversify away from unsecured debt sources. Covered bonds will be secured by a pool of assets. The value of assets in a covered bond pool must be at least 103 per cent of the covered bonds on issue. In doing so, they will increase the financing options for domestic authorised deposit-taking institutions. This is extremely important at a time of global financial uncertainty, particularly as we see the problems play out in Europe and the United States. They will reduce ADIs' reliance on offshore markets for funding and they could also increase competition in the mortgage market by decreasing borrowing costs.

Importantly, these reforms have the support of the big four Australian banks. These Australian banks are four of only nine in the world that have a credit rating of AA or higher. I note that Ralph Norris, when he was still the CEO at the Commonwealth Bank of Australia, said that 60 per cent of its mortgage book—and it is the biggest mortgage book in Australia—was funded by retail deposits. This will expand the sources of funds for the Commonwealth Bank. So, too, Gail Kelly at Westpac has been extremely supportive and other institutions, like Macquarie Bank or Suncorp, could issue AA rated covered bonds by virtue of their underlying credit rating.

Importantly, in a situation of insolvency, holders of covered bonds can have recourse to the pool of assets ahead of other debt holders and shareholders. There are safeguards for other debt holders—namely, the proportion of assets that can be committed to the covered bond pool is eight per cent of the value of the local assets. This is a figure that is actually a bit lower than what we have seen in Europe. But there is also the Financial Claims Scheme, which provides a guarantee for small investors, and APRA, the Australian Prudential Regulation Authority, will have the powers to regulate the use of these covered bonds.

Interestingly, when it looked at the initial draft legislation, Standard and Poor's, a well-known ratings agency, raised some concerns around the asset-liability mismatch of the risk of issuing covered bonds. They put out a research paper, which was covered by an Australian Financial Review article in April, which said:

These include considering the legal framework supporting the timely and full payment of covered bond obligations, availability of any payment moratorium or restructuring, cover pool servicing, and use of over-collateralisation if an issuer fails.

They were some of the concerns that they raised, but I am pleased to say that in this final draft of legislation now before the House many of these issues have been addressed. I know that once we implement this change in the Australian financial markets the covered bond market will grow gradually, and many expect it to be including up to a quarter of wholesale issuance over time. The Treasurer has said that Australian banks could issue up to $130 billion of covered bonds over the next few years.

Importantly, this will enable Australian banks to be on equal terms with some of its international counterparts. We have seen banks from Canada and Norway come to Australia with the issuance of covered bonds, where Australian banks have had their hands tied. Interestingly, this had already been put in place in New Zealand. So this will be an important reform for the Australian industry and it has the support of the Australian Bankers Association, including, as I mentioned, a number of the major banks in Australia.

As I said at the beginning, the coalition has taken the initiative on finance and banking reform with our nine-point plan, which was announced on 25 October 2010. I just want to mention these nine points because unfortunately the Treasurer—and I see here the Assistant Treasurer—have not taken heed of these nine points and introduced them. Hopefully, with the adoption of the covered bonds point they will also adopt our other suggestions. No. 1 was to give the ACCC power to investigate collusive power signalling. No. 2 was to encourage APRA to investigate whether the major banks are taking on unnecessary risks in the name of trying to maximise short-term returns that conflict with the preferences of those that backstop the system—namely, taxpayers. No. 3 was to formally mandate the RBA to publish regular, rather than irregular, reporting on bank net interest margins, returns on equity and profitability so that it could be determined whether the major banks were extracting monopolistic profits—that is, where the taxpayers were effectively subsidising supernormal returns. No. 4 was to 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.

No. 5 was to instruct Treasury and the RBA to investigate ways to further improve the liquidity of the residential and commercial mortgage backed securities market, which are an alternative source of funding for smaller lenders, including consideration of the coalition proposal to extend the government’s credit rating to AAA rated commercial paper in those markets to improve liquidity. No. 6 was to explore further simplification of the beloved Financial Services Reform Act, to make the business of actually getting out and doing business easier and simpler. No. 7 was to direct APRA to explore whether the risk weightings on business loans secured by residential properties are punitive. No. 8, and this is what we are discussing today, 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—and thank goodness the government is following the coalition's lead. The final point was to commission a full review into the financial system: something that should be done immediately.

I commend the leadership that the shadow Treasurer, the shadow minister for finance and our leader have taken on this issue. The issue of covered bonds will assist the financial services industry here and will assist consumers. We are following the developments in other markets, including New Zealand, where this has already been in operation. It has the support of the big four and other lenders, it has the support of the Australian Bankers Association, and importantly, it was an initiative of the coalition. So I commend the bill to the House.

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

I am not sure about the standing orders on repeating repetitious notes that you have been provided with but I think I have now heard the same speech on numerous occasions so I am very keen to hear what that member for Dunkley has to offer!

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

Madam Deputy Speaker, I take your wise counsel about not referring to the Financial Services Reform Act as 'beloved', but we do have a fondness for it and let me say that that fondness will not be reflected in the use of the term beloved.

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

Thank you!

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

We will save that for those that are beloved to us.

This is clearly an exciting day, as evidenced by the enthusiasm in the debate on the Banking Amendment (Covered Bonds) Bill 2011. It is interesting that we are standing here discussing yet another point in the coalition's nine-point banking plan. That nine-point banking plan is something that I know you, Madam Deputy Speaker Burke, are absolutely captivated by, and I am glad that the government members opposite are showing such a great interest in this nine-point plan. For those people in the gallery and those that are listening that have missed the description of the nine-point plan, it was announced in October 2010, dealing with what we on the coalition side thought were key points to address the ongoing strength and vitality of the banking industry.

That first item was one dear to my heart. That related to price signalling, and it was interesting that, notwithstanding that the opposition has very meagre resources available to it and the Commonwealth has all the horsepower, talents and expertise of the Commonwealth and Treasury, it was up to the coalition to actually draft a price-signalling amendment to the competition and consumer law, and subsequent to that leadership, the government then followed suit.

What we are doing today is dealing with the very important eighth point of the—

Geoff Lyons (Bass, Australian Labor Party) Share this | Link to this | Hansard source

It's a laugh!

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

Bill Shorten (Maribyrnong, Australian Labor Party, Assistant Treasurer) Share this | Link to this | Hansard source

Madam Deputy Speaker, I rise on a point of order. Standing order 75(a) warns against tedious and repetitious speech. Whilst I had some initial optimism after the member for Dunkley's introduction, this is now the sixth coalition explanation in the last hour of what a covered bond is.

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

Whilst I was trying to indicate to the member for Dunkley that repetition is getting away, the individual has the opportunity in this debate to make his points that are relevant to the bill. The member for Dunkley has the call.

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

Luke Hartsuyker (Cowper, National Party, Deputy Manager of Opposition Business in the House) Share this | Link to this | Hansard source

Could you read it?

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

I had a look through it, but I needed much encouragement to persevere in reading all of it. It covers the experience of covered bonds both in Europe and in North America. It captures the value of that marketplace. It identifies the fact that covered bonds have been used to finance public sector investment in infrastructure. It has also been used as a way of providing mortgage finance in the shipping industry.

Geoff Lyons (Bass, Australian Labor Party) Share this | Link to this | Hansard source

I thought it was about banking.

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

There are covered bonds that deal expressly with the shipping industry where banks are involved in financing shipping, if I could draw the connection for those who were interjecting. There are also covered bonds in areas of mixed assets. So there is quite a history of covered bonds in other countries and other jurisdictions, and success appears to have accompanied that experience. If you want to have a look at what has happened in Austria, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Luxembourg, the Netherlands, Norway, Poland, Portugal, Slovakia, Spain, Sweden, Switzerland, the Ukraine, the United Kingdom, the United States and—more recently—Canada, you can read that 500-page tome, which is absolutely gripping.

Elsewhere in the nine-point plan—and I am sure that the newly arrived Acting Deputy Speaker would like to hear about the nine-point plan—

Sid Sidebottom (Braddon, Australian Labor Party) Share this | Link to this | Hansard source

No, I am not acting.

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

there is a part which relates to the importance of affordable and accessible funding. Covered bonds may play a role in the availability of finance to small business. You would be aware that, during the global financial crisis, when there were constraints on funding availability and then cost implications, small business experienced a very cruel period when often banks told them that they were being risk rated and that they should wind back the facilities available to them, pay a higher price and provide security to cover their financing arrangements. Small business had a very tough time during the global financial crisis.

We need to not lose sight of what happens with banking activity for crucial customers to the Australian economy such as small business. I am optimistic that covered bonds will facilitate a new and potentially more affordable avenue for finance. I am particularly interested in what the banks will do with those funding instruments, and I am very focused on what the implications may be for second-tier and non-bank lenders, for whom access to covered bonds might not be quite as straightforward as it is for the big four.

Part of our banking plan went to seeking to encourage APRA to investigate whether the major banks and the financial institutions more generally are properly risk-weighting business loans where there is security provided by residential properties and other private assets. I submit that the current arrangements are punitive and conspire against lending to small business. If any one of us went to seek a home loan and provided some security, and we were then assessed and granted a mortgage for a certain amount with a certain bank, the loan would be offered at a certain rate. If the very same person went to the same bank seeking the same amount of money and offering the same amount of security, but this time for the purpose of small business development and operations rather than a home, they would encounter a punishing prudential arrangement that conspired against the small business and the banks that lend to them.

The way that capital adequacy requirements are applied makes it a challenge for banking institutions to stay as engaged in small business lending as they should be. The spread—the price difference between the cash rate and the amounts that are demanded of small business for such lending—is expanding, and the new reality of secured lending, where private assets are needed to support small business lending, is not adequately reflected in the prudential arrangements. Small businesses are getting a dud deal out of the cost that they are expected to pay for that facility. We need much more information about small business lending to understand the impact of finance's oxygen for that crucial sector of our economy. I call on the banks to continue to work with me to make that useful and relevant information more available. (Time expired)

Paul Fletcher (Bradfield, Liberal Party) Share this | Link to this | Hansard source

I am very pleased to rise to speak on the Banking Amendment (Covered Bonds) Bill 2011. In the brief time that I have available to me, I will make three points about this important legislation. First, I will talk about how the coalition's approach to the bill is that of a constructive opposition. Second, I will talk about the fact that covered bonds offer the potential to assist the Australian financial sector—and the banks in particular—to raise capital and about why that matters. Third, I will address the key issue of the impact of covered bonds on depositors and how concerns on that front are addressed in this bill.

I turn to my first point. On this bill, as on so many other bills, the opposition is playing a constructive, cooperative and value-adding role. The appearance of politics can sometimes differ from the reality, and I am sorry to say that there are some in this place who for their own purposes seek to create the impression that the coalition is obstructionist in its approach to opposition. This is unfortunate and not in accordance with the facts, Mr Deputy Speaker Sidebottom, and I know that your own commitment to a close analysis of the facts will be satisfied when we look at the statistical evidence.

The government likes to claim that, as of late September 2011, over 190 bills had been passed by this parliament. The reality is that approximately 170 of those were ultimately passed without a negative vote from the opposition. Indeed, in quite a number of cases, the opposition engaged very constructively by offering helpful suggestions and constructive amendments. In some cases our suggestions were accepted and our amendments included in the bill as it was passed into law. Only a relatively small percentage of bills, therefore, have been voted against by the coalition. I think it is important that we put that on the record so that there is no misunderstanding in the face of the unhelpful claims which are sometimes made by the government and which are not in accordance with the facts. This is an opposition which approaches the government's legislative agenda with an open mind. We are willing to work constructively with the government to improve legislation where that is appropriate. This bill we are debating today, the Banking Amendment (Covered Bonds) Bill, is one which the coalition welcomes and supports. That is not unrelated to the fact that the idea came from this side of the House. In October 2010 the shadow Treasurer, the member for North Sydney—my neighbour in the northern suburbs of Sydney—announced the coalition's nine-point banking plan. One of those nine points was:

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.

Imitation is the sincerest form of flattery, and two months later the government was eager to flatter the opposition when, in announcing its own banking plan, it included the following item:

Allow all banks, credit unions and building societies to issue covered bonds to broaden access to cheaper, more stable and longer-term funding …

The bill which is in front of the House this afternoon implements that measure.

It is perhaps not surprising that the Treasurer has found it necessary to draw on ideas from this side of the House because his own contribution to the performance of not only Australia's banking sector but Australia's wider economy has been a remarkably undistinguished one. Under the present Treasurer we have seen the merger of the Commonwealth Bank and Bankwest, and of Westpac and St George, leading to an unprecedented increase in concentration and a corresponding reduction in the intensity of competition. We have seen on the watch of the current Treasurer a panicked introduction of a $1 million guarantee for depositors, and this follows Australia having record for many, many years of not needing to have such a government guarantee. We now of course, with this guarantee in place, face the well-known problem of moral hazard—a problem in which bank managements are aware that should they take excessive risks—

Bill Shorten (Maribyrnong, Australian Labor Party, Assistant Treasurer) Share this | Link to this | Hansard source

Mr Deputy Speaker, on a point of order on relevance: I have waited for the first five minutes of the member's address and he has done everything but talk about the legislation at hand and has engaged in an attack on the Treasurer.

Sid Sidebottom (Braddon, Australian Labor Party) Share this | Link to this | Hansard source

The member for Bradfield has been speaking for five minutes. I would ask the member, and all members who wish to contribute to this debate, to be highly relevant to the legislation before them, which is the Banking Amendment (Covered Bonds) Bill 2011. I ask the member for Bradfield to be very relevant.

Paul Fletcher (Bradfield, Liberal Party) Share this | Link to this | Hansard source

Mr Deputy Speaker, I am being highly relevant. In fact, I have used the term 'covered bonds' on a number of occasions and I am explaining the policy context in which this bill comes before the House. A critical part of that policy context is the fact that the government was eager to take up the opposition's ideas because its own ideas had been either non-existent or very poor.

Sid Sidebottom (Braddon, Australian Labor Party) Share this | Link to this | Hansard source

The member for Bradfield will now contain his information and comments to the legislation.

Paul Fletcher (Bradfield, Liberal Party) Share this | Link to this | Hansard source

I continue to do that, Mr Deputy Speaker, as I have done consistently for the last five or six minutes.

Sid Sidebottom (Braddon, Australian Labor Party) Share this | Link to this | Hansard source

I await that eagerly.

Paul Fletcher (Bradfield, Liberal Party) Share this | Link to this | Hansard source

I now turn to the second point which I wish to address before the House this afternoon, which is the improved capacity which covered bonds offer to banks to raise capital. That is at the essence of the policy intention behind this bill. As I indicated, it is a much better approach to economic management than, for example, the approach of this government in introducing deficit after deficit. We have seen deficits of $26 billion, $56 billion, $49 billion and this year $23 billion. Of course, those deficits simply put upward pressure on interest rates and increase the desperate claims which the government is making on the financial markets. A much more prudent approach to banking policy and economic policy is the one which is contained in this particular bill, and that is the introduction of covered bonds.

It is an uncontentious proposition, which I am sure even the Assistant Treasurer will agree with, that banks play a critical role in our economy as providers of debt capital, and that is vital for home buyers, for business and for growth in our economy. Much of the money which banks lend out comes, in turn, from the money which is put on deposit with them. But, as we all know, Australian banks are not able to source all of their lending from the money which is on deposit with them. According to the Reserve Bank of Australia, as at June 2011 the gap between deposits held with authorised deposit institutions and loans made by those institutions—that is to say, the amount which needs to be secured from other sources—was $700 billion. It is that gap and the need to fill that gap which underpins the policy logic for allowing banks to issue covered bonds. The position is improving: domestic deposits now make up around half of the banks' sources of funds, up from 40 per cent in 2008. But by any measure there is still a significant amount of funding which must be obtained from sources other than deposits. A key means of filling that gap is the issue of bonds and other financial instruments by banks.

That is where covered bonds come in. They are designed to be another form of bond which a bank can issue to tap into the wholesale funding markets, with features which make them attractive to investors and in turn allow banks to raise funds on attractive terms. In that sense they are a form of securitisation, with some important variations which I will come to. Securitisation is a form of financing in which I have had some interest since my days as a banking and finance lawyer at Mallesons in the early nineties, when I had the opportunity to work on some of the earliest securitisation transactions in the Australian market, including the establishment of RAMS.

Securitisation has subsequently got something of a bad name following the global financial crisis, but at heart it is a sensible and useful financing technique under which a bank takes a pool of mortgages, for example, sells that pool of mortgages to a special purpose vehicle, in turn the special purpose vehicle issues bonds backed by the pool of mortgages and funds the purchase from the bank with the proceeds of the bond issuance, and in turn the bondholders are repaid out of the mortgage cashflows. As we all know, securitisation went off the rails because banks started paying less attention than they should have done to the credit quality of the underlying mortgages in part because, with the mortgages having been sold, they no longer had much of an incentive to have an ongoing interest in their credit quality.

I put to the House this afternoon the proposition that covered bonds can be thought of as a form of securitisation in which the holder of the bond issued by the special-purpose vehicle also has a right of recourse against the bank if the asset pool is inadequate to repay the bonds—that is to say, the bond holder also has the benefit of a guarantee given by the bank. I hasten to add that there are some important differences—in particular, a covered bond is issued not by the special-purpose vehicle but by a regulated credit institution. But there is an important similarity, which is that the bond holder continues to have security over the assets held by the special-purpose vehicle. The core idea remains the same: bond holders have their returns funded out of the pool of assets—very typically mortgages—and, in the case of covered bonds, this pool of assets is called the cover pool. There is a significant covered bond market in Europe and elsewhere in the world, but to date Australian banks have not been able by law to issue such bonds and hence tap into that market because, as we have heard, of the inconsistency between covered bonds and the absolute primacy of the claims of depositors in an insolvency.

The attraction of banks being able to issue covered bonds is that they typically allow banks to obtain funds more cheaply than they may be able to do using other forms of financing. Furthermore, covered bonds typically have longer terms than other kinds of wholesale financing and funding. As we saw in the 2008 crisis, where wholesale credit markets dried up, banks with a heavy reliance on short-term funding were very exposed. If they could not roll over their bonds or notes, they faced a liquidity crisis and, in turn, a solvency crisis. There are, accordingly, important systemic benefits in allowing banks to issue covered bonds as it will allow them to access a more stable form of funding and, in turn, that contributes to the stability of our financial system. This combination of longer terms and lower costs will provide an important advantage to Australian banks and, provided that competition is working effectively in the banking sector, those benefits will, in turn, be shared with the banks' customers.

Thirdly, I turn briefly to the question of the impact on depositors, because the point has been made that covered bonds do represent a change in the priority which banks' creditors enjoy. Historically, depositors have had first priority over all other unsecured creditors of banks. I highlight that the priority is only over other unsecured creditors, not over all creditors. That is an important distinction and one which means in practical terms that the value to deposit holders of the existing priority arrangements can be somewhat overstated. Even so, it is a priority which should not be lightly set aside. That is to say, the basis for giving the holders of covered bonds priority with deposit holders now to come second should be very tightly prescribed.

That is done through this legislation in several ways: firstly, through safeguards in relation to the cover pool—that is, the special-purpose vehicle. The cover pool is required to contain 103 per cent of the value of the loan and there must be a cover pool monitor. The second way in which the legislation limits the impact of this change in priorities is a cap on how much of its assets an ADI can contribute to the cover pool. That cap is set at eight per cent. In turn, this limits the amount of covered bonds that the institution can issue. Thirdly, these arrangements will be supervised by APRA, the Australian Prudential Regulation Authority, and it will set prudential standards covering the issue of covered bonds. These provisions, in turn, will lower the risk of the loan.

I conclude by making the observation that we are a constructive opposition and have brought to bear our constructive perspectives on this particular policy area, going so far as to, indeed, promote the concept of covered bonds. We are pleased to support this legislation because it gives effect to an idea that has considerable merit.

Scott Buchholz (Wright, Liberal Party) Share this | Link to this | Hansard source

I rise to speak on the Banking Amendment (Covered Bonds) Bill 2011, in which there seems to be a new-found interest. The bill amends the Banking Act 1959. The coalition will support the bill primarily because the concept contained therein was our idea in the first place. It is not often that you get the opportunity to set policy from opposition, but this is one of those happy occasions. We originally proposed this initiative as part of our nine-point plan for banking reform in October 2010. A couple of months later the Treasurer followed suit and adopted it, as well as other elements of our plan, as part of his banking plan announced that December. This is a good thing because it demonstrates that the Treasurer, even if not capable of developing good policy of his own, is at least capable of recognising good policy when he sees it.

This piece of light-fingered policy development is a part of an ongoing trend. After all, it is far from being the first time the government has adopted one of the opposition's policies as its own. It did it with the PBO and it did it with labour force participation measures. It copied a large number of budget savings measures. Now it has done it with the covered bonds.

Bill Shorten (Maribyrnong, Australian Labor Party, Assistant Treasurer) Share this | Link to this | Hansard source

We did it with LPG as well.

Scott Buchholz (Wright, Liberal Party) Share this | Link to this | Hansard source

Thank you; you did too. So what are covered bonds? Essentially, they are quite similar to asset backed securities. They are attractive to investors because they have a very low credit risk. The investors which operate in these larger markets often require additional security measures for clients' funds under management or superannuation contributions. Covered bonds are very low risk because they are covered by an asset worth at least 103 per cent of their value. In this sense, the bonds are oversecured. But, of course, that means that in the event of insolvency the holders of covered bonds have the first right to the pool of assets ahead of the shareholders and the other holders of the debt. However, covered bonds differ from asset backed securities in two ways. The first difference is that the asset backed securities are backed only by certain specific assets. If those assets go bad, as happened in the US with some of the mortgage backed securities, the cash flows and the value of those bonds go with it. Take, for example, the subprime market in the US. You had banks that had books which were secured by bricks and mortar—mums' and dads' homes. The value of those assets softened—and softened drastically in the subprime market, up to 70 per cent. The banks sold part of their book to hedge their risk, and the person who bought part of the book then carried the risk with the softening of the asset.

Unlike covered bonds, the bad asset can be swapped out with good ones and, in the event that they go bad, this means that the quality of the asset backing the bond is always of the highest quality. Unlike an asset backed security, the covered bond offers the opportunity for the asset—the bricks and mortar—to be swapped for a stronger asset, for example, commercial properties that might be linked to valuation rates on commercial rentals, which would offer far more security and which would be held, of course, at that 103 per cent.

The other difference is that the covered bond debt and the underlying asset pool remain on the issuer's balance sheet. In the event of default, investors have recourse to both the pool assets and the issuer of that bond. These differences mean that the issuing institution can access cheaper and potentially more stable funding in the wholesale capital markets. It will also allow the ADIs, the authorised deposit-taking institutions, to increase the amount of funding they get from domestic sources, which, in turn, will help reduce their reliance on offshore markets for funding.

For example, we can look at our banks at the moment, our four corner banks. Using an indicative figure of, say, 50 per cent of funding secured from domestic markets and 50 per cent offshore—some of those ratios are slightly different, bearing out to sixty-forty, but if we use fifty-fifty as an example—the benefit for the banks having access to a new market to raise capital raises a couple of opportunities for them in reducing their risks to the global market in the current conditions. While the chances are that it will mainly be the bigger institutions who will use these bonds, any increase in domestic sources of funding for the financial system as a whole is worth while.

There is an element of pragmatism here too. With economic conditions overseas in a parlous state, some European banks are now finding it tough to raise funding in the wholesale markets. There are also escalating concerns about sovereign risk, with countries like Greece, Portugal and Ireland and the like considered of serious concern. While Australian banks have not been directly impacted by this tightening in the global funding market due to their reliance on offshore markets, it goes without saying that any tightening in the market can, and probably will, impact on the cost of funding for Australian banks. For that reason it makes sense to broaden the funding opportunities for our banks, and that is what covered bonds will do. Again, with the international risk that exists for our banks with the amount of money that we are exposed, this gives the banks a funding opportunity to harvest some of those funds domestically. Currently our superannuation firms that look for those covered bonds investments are forced offshore. They will head into international markets to get that security, because under the Banking Act we are unable to provide that.

Covered bonds are not some newfangled financial instrument. If anything, Australia is late coming to the party. The reason for this delay in Australia is that they do have a couple of shortcomings. First, by their nature covered bondholders have first claim over the pool of assets, pushing normal deposit holders further back in the queue. Second, because the asset pool backing covered bonds is rotated to ensure only 'good' assets are in place, there is a risk that bad assets will be left to cover the claims of other depositors. However, I believe this legislation has sufficient protections in place to ensure depositors are not left in the lurch.

It does this in two ways. The first is by limiting the proportion of Australian assets which can be committed to the covered bond pool to eight per cent—quite a minimum amount of exposure. Secondly, and probably most importantly, the Financial Claims Scheme provides a government guarantee for small depositors. The funds of the depositors are protected no matter their priority under the Banking Act.

Earlier this afternoon there was an opposition speaker to the bill from the crossbenches and two points he raised went to those particular concerns—knocking the depositor from the first place of security, and having the government taxpayer carry the risk. I want to rebut those points. As an opposition we would not support this bill if the depositors were exposed. I believe that the bill does give sufficient protection for depositors when you evaluate the risk. The bond pool is only eight per cent of the evaluating risk, leaving 92 per cent not exposed. The Australian banks then have the opportunity to increase their domestic market growth by having additional product which was not available to them historically. They also have the capacity to reduce exposure in the volatile markets in the current global conditions, and they do this with an intention of improving their liquidity.

He also raised the issue of the taxpayers and the government carrying the risk. In the last GFC downturn, the government provided the bank guarantee, so we are no strangers to extending a hand and trying to keep our market and our banking system strong. And, from this side of the House, I suggest that our banking system is one of the world-renowned banking models.

In conclusion, I would like to say that, while we on this side of the House approve of this legislation, the Treasurer's preferred method of financial regulation reform has been routinely substandard. In this, as in almost everything else this government does, there appears to be no master plan, no vision and no real objective—that is where I would stick in the nine-point plan, but I think you have heard that one so I will run over the top of that—instead, one gets the distinct impression that they are making it up as they go along. The competitive environment of both the Australian and the international finance systems has gone through enormous change since the global financial crisis. That is why we believe there is a need for a thorough review of the Australian financial system to decide what kind of system we want to see and what changes, if any, are required to achieve it. The coalition will support this bill, primarily because the concepts contained within it were our idea in the first place.

Jamie Briggs (Mayo, Liberal Party, Chairman of the Scrutiny of Government Waste Committee) Share this | Link to 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.

Sid Sidebottom (Braddon, Australian Labor Party) Share this | Link to this | Hansard source

I remind the member for Mayo that I want him to deal with the amendment. You have ranged fairly widely, so I just want to bring you back to the bill.

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

I was talking about the banking industry's troubles during the global financial crisis and how we dealt with those. I thought that was dealing with the bill in hand.

In conclusion, this is a good proposal brought forward by the shadow Treasurer and which has been slowly but surely adopted by this Treasurer. We appreciate the fact that he has taken his time to get it right. The coalition will be supporting this proposal because it is a good proposal. The other eight points in the shadow Treasurer's plan were also good proposals and we hope that the Treasurer will continue to work through them and implement them because we think we have the right plan to get the right balance.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

I am pleased to rise to speak on the Banking Amendment (Covered Bonds) Bill 2011. In particular, when we review this bill it is important to consider how we got here. Recently the Treasurer was given the international Euromoney magazine finance minister of the year award. Those on this side of the chamber scratched their heads more than a little at the notion that of all people Wayne Swan, the member for Lilley, received the award and yet Peter Costello, the former member for Higgins, did not receive the award. The current Treasurer took this country from a net surplus of $60 or $70 billion in assets and a budget surplus of around $22 billion to a country encumbered with $107 billion worth of debt and running a budget deficit of approximately $47 billion. The notion that the Treasurer who presided over that turnaround in Australia's fortunes was the international finance minister of the year while the Treasurer who brought about 10 surplus budgets, built up $70 billion in assets and built a budget surplus of $22 billion was not entitled to receive that award had many of us scratching our heads.

But there are other policy aspects that this Treasurer has looked at and reforms that this government has made which have led a number of us to query the policy focus and, indeed, the lack of savvy of the government. When it comes to banking policy, one of the most crucial reforms, which in my view was made in error, was the decision to initially provide an unlimited bank deposits guarantee. I am aware, Mr Deputy Speaker, that you have an itchy trigger finger when it comes to dealing with the substance of this matter.

Sid Sidebottom (Braddon, Australian Labor Party) Share this | Link to this | Hansard source

Indeed.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

But I would make the point, Mr Deputy Speaker Sidebottom, mindful of that, that this policy in terms of Labor's approach to depositors goes to the very core of the covered bond issue. The reason it goes to the core of the covered bond issue is that, at the height of market uncertainty about where depositors would find sanctuary, it was the Labor government's decision to introduce an unlimited guarantee that effectively completely denuded market linked investment funds, the third-party smaller tier lenders out there in the marketplace. As a direct consequence of Labor's completely botched policy in this regard, we saw the mass migration of depositors' funds from market linked investment funds to, predominantly, the four major banks. We saw ADIs and, in particular, the four major banks gorging themselves on depositors' funds as depositors sought sanctuary, racing from market linked investments to the four major banks.

As a direct result of that botched Labor Party policy, we saw competition in the banking sector effectively collapse. The four major banks now have the highest market share percentage when it comes to loans that Australia has seen for decades. We have seen massive blow-outs in the differential between the official cash rate and bank mortgage rates for, for example, a standard variable mortgage. These are the consequences of a failed approach to policy that the so-called finance minister of the year brought to the table. Now, in an attempt to try to deal with the issue of banking competition, the finance minister of the year has once again had to go to the opposition to look for policy initiatives—because it was in fact the shadow Treasurer, who is at the table, who first raised the issue of implementing a covered bond market in the Australian economy. It was the member for North Sydney who, two months prior to the announcement by this Labor government, raised the importance of introducing covered bonds. I do not want to sound bitter, so I want to throw a bouquet to the international finance minister of the year and highlight the fact that I welcome the Labor Party's decision to embrace coalition policy in this respect. I welcome the fact that they have taken this decision, because otherwise the Labor Party, short of adopting coalition policy, would continue their merry flirt with bad policy that would make a bad situation even worse.

So the covered bonds bill that is before the House today implements, in many respects, a central tenet of the nine-point plan that was introduced on 25 October last year by the shadow Treasurer. Covered bonds—

Steve Gibbons (Bendigo, Australian Labor Party) Share this | Link to this | Hansard source

Why didn't you do it 12 years ago?

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

Mr Deputy Speaker Sidebottom, I am forced to take the interjection, because it highlights—

Sid Sidebottom (Braddon, Australian Labor Party) Share this | Link to this | Hansard source

No, you are not forced to do anything except discuss the legislation before you.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

I am dealing with the legislation—

Sid Sidebottom (Braddon, Australian Labor Party) Share this | Link to this | Hansard source

I am asking you to deal with the legislation, so please do so.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

I am very directly—

Mr Hockey interjecting—

Sid Sidebottom (Braddon, Australian Labor Party) Share this | Link to this | Hansard source

No; the member for North Sydney has nothing to do with the debate at the moment. Please continue.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

I am very directly dealing with the legislation, Mr Deputy Speaker, because the question that was put forward, almost comically, by the member for Bendigo was: why didn't we do it 12 years ago?

Sid Sidebottom (Braddon, Australian Labor Party) Share this | Link to this | Hansard source

The member for Moncrieff will address his remarks to the bill and not to any other member in this House. Thank you. I am asking you again to be relevant to the bill—

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

And I will be directly relevant to the bill—

Sid Sidebottom (Braddon, Australian Labor Party) Share this | Link to this | Hansard source

and I want to hear it now. Thank you.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

Why this bill was not introduced 12 years ago is directly relevant. The reason why is that there was no need to implement a bill like this 12 years ago because, at that time, coalition policy drove competition in the banking sector. The core focus of this bill is to drive competition. That is the focus of this bill. Let me explain it in Economics 101 terms for the members of the government, who are apparently implementing this policy without any understanding of what it actually does. If you want proof, look at the market share of lending. It was the coalition that, for 12 years, increased the smaller players' share of the market when it came to credit, as opposed to the complete reversal of that situation under this Labor government. This Labor government has driven the single biggest increase in the concentration of market share in the four major banks that this country has seen for decades. So, Mr Deputy Speaker Sidebottom, that goes to the very core of why this bill, and indeed a covered bond market, was not previously needed in this country but is now required as a consequence of Labor's ill-informed policy changes.

Many speakers in this debate have outlined what covered bonds are and what they do. There are safeguards that have been put in place, including an eight per cent limit on the pool of assets and a requirement for there to be 103 per cent effective coverage on the bonds that have been issued—and of course we welcome both of those things. There could be arguments that it should be 10 per cent, 12 per cent or five per cent, but eight per cent seems reasonable, and I note that a large number of marketplace operators welcome that eight per cent figure. The need for there to be a 103 per cent overall level of coverage is also a prudent step.

I am very mindful, though, of the change as a direct consequence of this bill that will see deposit holders effectively relegated to a secondary position, if I can put it in lay terms. Naturally, to some extent this could increase the degree of angst in the community. But I think it is important to recognise that that degree of angst is largely unfounded because of where deposit makers currently already exist with respect to secured and unsecured creditors. The issuance of covered bonds does change that position somewhat, but not to such a significant extent that it warrants, I believe, any level of anxiety. Furthermore, the fact that it is limited to eight per cent of the asset base does provide a very high level of assurance that they need not be concerned.

I sum up by saying again that I welcome being able to throw a bouquet in the direction of the international finance minister of the year because I think it is good that he has adopted coalition policy. I note that the Assistant Treasurer, who has carriage of this particular piece of legislation, is at the table. I have no doubt that he is of the view that, if he had the opportunity to be Treasurer, which I doubt he is attempting to engineer, he would seek to introduce the same bill. I think it is good that the Assistant Treasurer has adopted coalition policy as well in that respect. There are many aspects of this bill that the coalition endorse, and we hope—certainly, I sincerely hope—that we see an increased competitive tempo in the marketplace as a direct result of the passage of this bill.

Bill Shorten (Maribyrnong, Australian Labor Party, Assistant Treasurer) Share this | Link to this | Hansard source

The Gillard government has a broad agenda to ensure the strength and sustainability of Australia's financial system for the future. Whilst I do not agree with everything the member for Moncrieff said, I do appreciate he made such a valiant effort to be in the House both yesterday and today.

Three years ago, when the global financial crisis hit, we acted decisively to secure the flow of credit to millions of families and small businesses. We are now focused on building Australia as a financial centre by ensuring our banking system has a diverse range of funding options. The Banking Amendment (Covered Bonds) Bill 2011 to allow covered bond issuance is at once both a natural step and a significant step forward towards our future economy. The government has been working on this important reform for some time. In January last year the Treasurer directed the Treasury to begin methodically consulting with industry and our regulators on a framework for covered bonds in Australia. This was 10 months before the shadow Treasurer had even heard of covered bonds when some of his industry mates advised him to include a reference to the concept in his speech to the Australian Industry Group in October last year. We have worked closely with industry to design this bill since early last year. It is a critical economic reform to strengthen and diversify the Australian financial system's access to cheaper, more stable and longer-term funding in domestic and offshore wholesale capital markets. Treasury estimates the government's framework will allow Australian institutions to issue some $130 billion of covered bonds in coming years.

This is just one part of our agenda to build Australia as a financial hub within Asia. Australia has a deep and sophisticated financial market sector. Australia is recognised as a regional leader in investment management, particularly given that we have the fourth-largest number of private funds under management in the world for our superannuation system. We are a regional leader in areas including infrastructure finance and structured products. The strength of Australia's financial services sector is underpinned by a highly-skilled, highly-educated, multilingual workforce and advanced business infrastructure. Finance and insurance is the fourth-largest sector in Australia's economy. It is also a major employer and a growing source of exports. Beyond these more immediate contributions to the economy and employment, a well-functioning financial system is vital for broader economic prosperity given its role in efficient capital allocation. It is also important in addressing future macroeconomic challenges, including the need to grow and manage our retirement savings as our population ages and to diversify our economic base. A deep and liquid covered bond market will help channel our pool of superannuation savings through the financial system into productive investment in all sectors of our economy.

Twenty years ago the Keating Labor government introduced one of the great economic reforms: nine per cent superannuation for every worker in Australia. This year sees the Gillard Labor government progressing the necessary steps by increasing the universal compulsory savings rate from nine to 12 per cent, getting rid of unfair fees and charges to leave more money in people's balances for retirement, finding lost superannuation, consolidating multiple accounts and improving the duties of trustees. By putting money into superannuation Australians steadily build up capacity to have lifetime income security. The goal of lifetime income security is a Labor vision and goal for the whole nation. It also improves the circumstances decades ahead for our children. The more private savings people have to retire on, the less the remaining workers need to pay in tax to help support these retirees. That is why lifting the superannuation guarantee from nine to 12 per cent is so important.

Delivering these latest reforms in covered bonds, financial services and superannuation helps establish Australia for the future. As the Treasurer has confirmed, our framework ensures the absolute security of depositors' savings and the protection of taxpayer funds. This is an important reform for all Australians. It is critical to ensuring our banking sector can keep providing reasonably priced credit to households and small businesses. For that reason it deserves the strongest support of the parliament. I commend this bill to the House.

Question agreed to.

Bill read a second time.