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Thursday, 13 October 2011
Page: 7342

Senator CORMANN (Western Australia) (13:11): The coalition supports the Banking Amendment (Covered Bonds) Bill 2011. In fact, this legislation implements a suggestion that was made by the coalition as far back as October last year. It was, of course, part of Joe Hockey's nine-point plan. In fact, it was point 8 of the coalition's nine-point banking plan, which was announced on 25 October 2010. It took the government only 12 months to finally act on what should have happened some time ago.

Schedule 1 of the Banking Amendment (Covered Bonds) Bill 2011 makes amendments to the Banking Act 1959 to enable authorised deposit-taking institutions—which includes banks, credit unions, and building societies—to issue covered bonds. This is an initiative to increase financing options for domestic Australian deposit-taking institutions. It will allow them to increase the amount of funding they get from domestic sources and will reduce their reliance on offshore markets for funding.

Covered bonds are likely to be used mainly by the big four banks, although the bill does provide for ADIs to enter into an aggregating entity to issue covered bonds as well. It is unlikely that the smallest authorised deposit-taking institutions will use this funding facility. Nevertheless, any increase in domestic sources of funding for the financial system as a whole is of course very worthwhile. Covered bonds are bonds issued by a financial institution that is secured by a pool of assets. The value of assets in the 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 the holders of covered bonds have first rights to the pool of assets covering them ahead of shareholders and ahead of other holders of debt. The rights of other holders of debt are protected in two ways. First, the proportion of Australian assets that can be committed to covered bond pools is limited to eight per cent. Second, the financial claim scheme provides a governĀ­ment guarantee for small depositors, currently up to a limit of $1 million, which will be reduced 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 the claims of depositors.

As I have mentioned, this is an idea that was promoted by the shadow Treasurer, Joe Hockey, as far back as October last year. It was a very prominent part of the coalition's nine-point banking plan and was copied in Treasurer Swan's announcement of the government's Competitive and Sustainable Banking System plan. While we are disappointed that it took the Treasurer so long to finally act on this, we are pleased that we are now finally dealing with this legislation and commend it to the Senate.