Aussie regulator, unlike the RBNZ, still opposed to banks' issuing covered bonds

Australia’s major banks would love to follow their Kiwi subsidiaries by issuing covered bonds, but unlike our Reserve Bank, their regulator won’t let them.

Heather Wellard, the director of public relations for the Australian Bankers’ Association, told interest.co.nz the Federal Government should be taking steps to enable banks to issue covered bonds.

Five to 10 year senior debt instruments secured by the cashflows of mortgages written by a bank, covered bonds are effectively banned by Australia’s Banking Act. That's because covered bonds effectively carve out secured pools of assets meaning, in the event of a bank default,  depositors are explicitly subordinated by covered bond investors.

Here the Reserve Bank says it's comfortable with banks issuing the equivalent of up to 5% of their total asset value in covered bonds to help them meet new funding regulations requiring them to source at least 65% of their of their funding from either retail deposits or long-term wholesale funding with maturities of more than one year.

The BNZ this week issued NZ$425 million worth of covered bonds in the first tranche of a NZ$3 billion, triple A rated programme. Westpac New Zealand is also aiming to issue covered bonds this year. See related story.

In Australia Wellard said the rules should be changed so the parents of our banks are allowed to issue covered bonds. Doing so would improve their funding diversification, liquidity profiles and funding costs.

“Covered bonds offer banks, and the Australian economy, the capacity to raise overseas money at longer maturities and keener prices than is currently the case,” Wellard said.

“This pricing and maturity advantage points to benefits to borrowers in the form of lower costs.”

The Australian Bankers' Association counts the ANZ Banking Group, Westpac Banking Corporation, Commonwealth Bank of Australia and National Australia Bank - the parents of New Zealand's major banks - among its members.

However, Andrew McCutcheon public affairs manager for the Australian Prudential Regulation Authority (APRA), said the regulator had always been opposed to covered bonds and remained so. He pointed to an explanation of APRA’s position in its 2008 annual report.

This notes that Australia’s Banking Act requires that, if an authorised deposit-taking institution (ADI) becomes unable to meet its obligations or suspends payment, the assets of the ADI in Australia are to be available to meet that ADI’s deposit liabilities in Australia prior to all its other liabilities.

“In substance, covered bond structures subordinate the interests of depositors of ADIs to the interests of the covered bond holders. For this reason, APRA has an in principle objection to such structures.”

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