Covered bond cap changes hailed as competitive pricing boost

Speaking at the Citi A50 Australian Economic Forum in Sydney, Chalmers outlined the changes as part of a broader push to improve banking competition and productivity.

“Our sensible proposals will reduce unnecessary costs in the financial sector without compromising on standards,” Chalmers said.

More funding flexibility, more competitive pricing

BOQ chief executive Rod Finch said the proposal addressed a funding constraint his bank had sought to change.

“This is a sensible reform and one BOQ has advocated for as it is a step towards levelling the playing field for smaller banks,” he said.

Finch added that the benefits would “flow through to customers”, linking more efficient funding to greater lending and investment capacity.

“Giving banks like BOQ greater access to efficient wholesale funding gives us more capacity to compete, invest and lend, which is ultimately good for customers,” he said.

ABA chief executive Simon Birmingham similarly welcomed the potential for smaller institutions to sharpen their offerings.

“Lifting the cap means small and mid-tier banks have more room to price competitively and invest in better services, which is good for competition and good for customers,” Birmingham said.

Covered bonds give investors claims against both the issuing bank and a dedicated pool of high-quality assets, typically residential mortgages.

That dual protection can secure a higher credit rating than the bank itself, enabling cheaper funding than unsecured debt and access to longer borrowing terms.

The proposed increase concerns assets committed to these “cover pools”, expanding the permitted proportion by half from the ceiling established when Australia legalised covered bonds in 2011.

The pricing implications are particularly relevant to lenders who rely on mortgage brokers to reach borrowers, where funding costs influence their ability to win new business.

The proposal remains subject to consultation, which closes on 30 October.

A funding gap the regulators want narrowed

The proposed change follows the Council of Financial Regulators’ (CFR) review into small and medium-sized banks, released in August 2025, which recommended considering the higher cap.

The review identified covered bonds as a means for medium-sized banks to obtain highly rated debt despite lower institutional credit ratings, partially narrowing their funding disadvantage against larger competitors.

Birmingham said progressing the recommendation was a welcome response to the review’s findings.

“This was a clear recommendation from the Council of Financial Regulators’ review into small and medium-sized banks, and it’s good to see the government getting on with it,” he said.

The ABA added that the longer-term funding could also reduce rollover risk: the prospect of refinancing maturing debt when market rates have risen, or funding availability has tightened.

The measures form part of a broader package announced in May’s federal budget targeting annual compliance savings of $780 million.

Other changes released for consultation on Friday included streamlined reporting requirements for smaller banks and doubling the withdrawal limit for deceased-estate expenses to $30,000.

Birmingham said reducing regulatory costs need not weaken customer safeguards.

“Sensible reforms like these cut unnecessary cost without lowering protections for customers,” he said.

The wider budget package also proposed removing the requirement for authorised credit representatives to maintain separate Australian Financial Complaints Authority (AFCA) membership, which the government said would ease obligations for more than 40,000 representatives.

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