Pressure is mounting on treasury officials to allow banks to issue ‘covered bonds’ as a means of restoring competition to the mortgage market.
Covered bonds would allow AA or BBB rated banks to issue bonds with AAA credit rating.
Covered bonds act like senior debt but have the additional security of being ‘covered’ by assets quarantined by the bank from other creditors.
If the bank defaults on its debt, holders of covered bonds have a first right to claim the quarantined assets, typically residential mortgages.
On July 7, the Australian Securitisation Forum (ASF) made a submission to treasurer Wayne Swan asking that the Banking Act 1959 be amended to permit the issuance of covered bonds.
In the submission, the ASF said introducing covered bonds would allow Australian banks to compete for funding on equal terms with European banks.
Furthermore, the submission noted covered bonds are a more defensive form of funding than senior unsecured bonds.
“While the market for covered bonds was disrupted, like all credit markets, after the GFC, its resilience has been demonstrated by the fact that it was the first secured debt market to recover.
This is in marked comparison to the senior unsecured market, as well as the market for RMBS and other asset-backed securities,” the ASF said.
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