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Major Australian Lenders Renew Push To Issue Covered Bonds
Australia’s major lenders want the ability to sell covered bonds to investors, but will probably find it hard to convince a sceptical government to give them permission to do so, since the government believes that in doing so, it would simply further entrench their dominance of the mortgage lending market.
The government is not keen on taking any steps that might further reduce competition in mortgage lending, which is currently dominated by the four major lenders.
Covered bonds typically favour the types of issuers who have strong credit ratings and large depositor’s bases”. Covered bonds would only add to non-competition in the marketplace,” said an official at a regional bank.
Under Australian law, banks are required to hold depositor’s claims on their assets above all other creditors in the event of a bankruptcy. As a result, under current law, Australian financial institutions cannot issue covered bonds, because those bonds subordinate the depositor. The bond holder has the right of recourse to the assets that have been used to cover the bond, usually a pool of mortgages, or other secured collateral, which the bank maintains on its books, and “covers” the bond.
The larger lenders want the law to change, so that they can issue covered bonds, which are very common in Europe, but still unusual in the Asia Pacific region. The lenders claim that issuing this type of debt would enable them to diversify their funding sources, increase their average debt maturity, and therefore increase competition in lending.
Australia’s smaller lenders worry however that they would face a disadvantage, since most of the issues would first be pitched to international investors who are only really familiar with the major Australian banks.
Covered bonds were not a “panacea”, said David Liddy, chief executive of the Bank of Queensland. They would not “help us in terms of the pricing disadvantage that we currently have against the majors”, he said.
Two years ago a move to introduce covered bonds was killed by the prudential regulator.
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