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Wednesday, 12 October 2011
Page: 11582


Mr FRYDENBERG (Kooyong) (12:16): 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:

First, the bond is issued by, and the bondholders have full recourse to, a regulated credit institution.

Second, bondholders have a claim against a cover pool of assets in priority to all other unsecured creditors.

Third, the credit institution has an ongoing obligation to maintain enough assets in the cover pool to satisfy the claims of covered bondholders.

And finally, the obligations of the credit institution are supervised by an independent regulatory body.

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. I commend the bill to the House.

The DEPUTY SPEAKER ( Ms AE Burke ): 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!