The Government has introduced the Banking Amendment (Covered Bonds) Bill 2011 into the House of Representatives.
If passed the Bill will make amendments to the Banking Act 1959 to enable Authorised Deposit-taking Institutions (ADIs), which includes banks, credit unions and building societies, to issue covered bonds either individually or, for smaller ADIs, in a group.
Should the ADI not meet its contractual obligations, the covered bondholders have recourse to the ADI and a specified pool of high quality assets (called the cover pool of assets). The recourse to the ADI issuing bonds and the pool of assets securing covered bondholders (and the consequent retention of credit risk by the ADI issuer) distinguishes covered bonds from other asset-backed securities (such as residential mortgage-backed securities (RMBS)) where the credit risk held by the holder of the security is on the pool of assets only. The dual-recourse nature of covered bonds also differs from ADI wholesale funding where the claim is only against the issuer (that is, the claim is not secured against any particular assets of the issuing ADI).
As a protection for depositors, this Bill includes a regulatory cap on the amount of covered bonds an ADI can issue. This regulatory cap ensures that only 8 per cent of an ADI’s assets in Australia at the point of issuance of covered bonds are included in a cover pool (or cover pools) for the benefit of covered bondholders in priority of the ADI’s other creditors in Australia.
The Bill specifies the assets that are eligible for inclusion in the cover pool and gives APRA to make prudential standards.
The Bill also permits smaller ADIs to pool their assets together in order to issue covered bonds. The Bill provides a model for entering into arrangements involving several ADIs. This model involves the ADIs participating in the arrangement establishing a new entity, called the aggregating entity. This entity would not be an ADI, and would issue a debt instrument secured by covered bonds issued by each of the ADIs to the aggregating entity. The ADIs participating in this arrangement would be subject to the same regulation applying to the case where there is only one ADI in the arrangement relating to issuing covered bonds.
