News on Covered Bonds: Australia’s draft Covered Bonds bill
Australia’s draft Covered Bonds bill
6 April, 2011: After much consultation between the Australian Treasury and industry participants on the preferred legislative framework for the issuance of covered bonds by ADIs, the Australian Federal Government has released an exposure draft of the Banking Amendment (Covered Bonds) Bill 2011.
As a part of the commitment under the Competitive and Sustainable Banking Package, where the Australian government had announced a measure to allow issuance of covered bonds by Australian banks, credit unions and building societies, the Treasury released the exposure draft Bill and the draft explanatory memorandum providing legislative support for issuance of covered bonds by ADIs in March, 2011.
The Australian Prudential Regulation Authority (APRA) had prohibited the issuance of covered bonds by financial institutions as it was of the view that in the insolvency of an ADI issuer the covered bondholders would take priority over other creditors, so covered bonds would contravene the depositor protection standards set out in the Banking Act. By now amending the Banking Act by the Government is allowing financial institutions to access cheaper, more stable and longer duration funding in the wholesale capital markets. However measure to allow issuance of covered bonds will have no impact on the rights of the depositors. Salient features of the bill are:
- ADIs can issue covered bonds with a cap of 8% on the value of the cover pools of the assets, preventing the covered bondholders having claim over more than 8% in the assets at the time of issuance of covered bonds.
- Australian Prudential Regulation Authority shall regulate the issuance and shall have the authority to restrict the issuance of covered bonds that are non-compliant with the legislations.
- The cover pool would be held and owned by a special purpose vehicle separate from the ADI issuing the covered bonds and the ADI shall transfer additional assets or maintain the cover pool in order to meet its obligations.
- The ADI is required to appoint a cover pool monitor to monitor the value of the cover pool and report on the status of the cover pool.
Assets eligible to form a part of the cover pool, as specified in the Bill include
- government debt instruments, not greater than 20% of the value of all the assets in the cover pool at any time
- a loan secured by a first ranking mortgage over residential property provided that the sum of the principal amount of the loan when it is issued and the total value of all other debts and other obligations secured against the residential property must be no greater than 80 per cent of the value of the residential property;
- a loan secured by a first ranking mortgage over commercial property provided that the sum of the principal amount of the loan when it is issued and the total value of all the other debts and other obligations secured against the commercial property must be no greater than 60 per cent of the value of the commercial property
- a derivative (within the meaning of section 761D of the Corporations Act 2011) used to hedge movements in exchange rates or interest rates relating to the special purpose vehicle’s liabilities
In the event of default of the ADI, though the covered bondholders would have priority of claims in the cover pool over the depositors as well, the depositors would be protected by the Financial Claim Scheme. However any claim of the covered bondholders over the cover pool would represent unsecured claims on the ADI.
The draft bill shall remain open for public consultation till 22 April, 2011. Get the text of the exposure draft and explanatory memorandum here.
[Reported by: Nidhi Bothra]