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2010-2011
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
BANKING AMENDMENT (COVERED BONDS) BILL 2011
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Covered Bonds .............................................................. 5
Index ..................................................................................................... 31
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
ADI Authorised Deposit-taking Institution
ADIs Authorised Deposit-taking Institutions
APRA Australian Prudential Regulation Authority
FCS Financial Claims Scheme
RMBS Residential mortgage-backed securities
this Bill Banking Amendment (Covered Bonds) Bill
2011
1
General outline and financial impact
Outline
Schedule 1 of the Banking Amendment (Covered Bonds) Bill 2011 makes
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.
Date of effect: Date of Royal Assent
Proposal announced: The measure was announced by the
Deputy Prime Minister and Treasurer in Press Release No. 091 dated
12 December 2010. The measure is one of a number of measures
announced as part of the Government's Competitive and Sustainable
Banking System reforms.
Financial impact: Nil
3
Chapter 1
Covered Bonds
Outline of chapter
1.1 This Banking Amendment (Covered Bonds) Bill 2011 (this Bill)
amends the Banking Act 1959 to enable ADIs, which includes banks,
credit unions and building societies, to issue covered bonds. This measure
was announced by the Deputy Prime Minister and Treasurer on
12 December 2010.
Context of amendments
What is a covered bond?
1.2 A covered bond is a dual-recourse bond (or secured debt
instrument) issued by banking institutions (which in Australia are ADIs).
The ADI issuing the covered bond has an ongoing obligation to make
principal and interest repayments to covered bondholders (that is, the
investors).
1.3 The dual-recourse nature of covered bonds comes from the fact
that covered bondholders have two mechanisms to recoup their
investment in the event that the issuing ADI is in default (that is, the ADI
does not meet its payments to covered bondholders). The covered
bondholders firstly have recourse to the ADI, and should the ADI not
meet its contractual obligations, the covered bondholders have recourse to
a specified pool of high quality assets (called the cover pool of assets). If
the cover pool of assets is insufficient to meet the covered bondholders
claim, then the covered bondholders retain recourse back to the issuing
ADI for any outstanding residual amounts due to them. Any residual
claim of covered bondholders on the ADI would rank below most
depositors and claims by government.
1.4 Issuers of covered bonds generally seek a AA or AAA credit
rating for the covered bond issue. Further, the rating of the covered bond
issues is typically higher than the credit rating of the issuing ADI
reflecting the dual-recourse nature of covered bonds and the high quality
5