News on Covered Bonds: Australia introduces Covered Bonds legislation

Australia introduces Covered Bonds legislation

 

15th September, 2011: Banking Amendment (Covered Bonds) Bill, 2011 has been introduced today by Treasurer Wayne Swan to the House of Representatives, Australia to amend the Banking Act, 1959 facilitating financial institutions to issue covered bonds and is expected to generate a sale of A4130 billion in coming years. The exposure draft of the bill was issued in April, 2011 (see our news on the subject here).

The bill includes a regulatory cap on the amount of covered bonds an institution can issue, with the pool of assets used to secure issuance no greater than 8 percent of an institution's assets. The cap shall limit the claim of the covered bondholders over the assets of the depository institutions protecting the claims of the unsecured creditors such as depositors arising from the preferred claim of covered bondholders over the assets of ADIs. The eligible assets to form a part of the cover pool are high quality assets such as residential mortgages and the value of the assets in the cover pool should be 103% of the value of the outstanding covered bonds.

There have been concerns over offshore entities issuing covered bonds in Australia and tapping on the savings while the banks tried to deal with the global financial turmoil. The legislation is expected to reduce the dependence of banks on overseas funding markets, provide alternative and cheaper means of accessing funds and diversifying funding base.

Both houses are expected to pass the law by the year end. The text of the bill is available here.

[Reported by: Nidhi Bothra]