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Wednesday, 12 October 2011
Page: 11584

Mr BILLSON (Dunkley) (12:26): 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.

The DEPUTY SPEAKER ( Ms AE Burke ): Thank you!

Mr BILLSON: 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—

Mr Lyons: It's a laugh!

Mr BILLSON: 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—

Mr Shorten: 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.

The DEPUTY SPEAKER: 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.

Mr BILLSON: 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.

Mr Hartsuyker: Could you read it?

Mr BILLSON: 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.

Mr Lyons: I thought it was about banking.

Mr BILLSON: 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—

The DEPUTY SPEAKER ( Mr S Sidebottom ): No, I am not acting.

Mr BILLSON: 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)