House of Representatives

Banking Amendment (Covered Bonds) Bill 2011

Second Reading Speech

Senator Feeney (Victoria-Parliamentary Secretary for Defence)

Today I introduce a bill which goes to the core of the government's agenda to secure our financial system for the future.

Exactly three years ago today, the collapse of Lehman Brothers pushed the global financial system to the very brink of collapse.

The government's swift actions helped Australia avoid recession, and secured the strength and competitive foundations of our banking system.

We have continued to build on the strength of our financial system in the last three years, working with our regulators and industry.

The government has worked closely with industry and our regulators since early last year on a framework for covered bonds in Australia.

We released exposure draft legislation for consultation in March this year, followed by a second round of targeted consultation in July.

There could not be a more appropriate day than today-exactly three years on from Lehman Brothers-for the parliament to now consider this key element of our plan for a strong and sustainable financial system.

Today I will outline the substantial economic benefits flowing from the introduction of covered bonds in Australia.

But first, I will provide an update on just some of the reforms we have already put in place to build up competition in the banking system.

Just nine months ago, I announced new reforms to build a competitive and sustainable banking system to give every Australian a fairer go.

We are introducing three broad streams of reform to empower consumers, support smaller lenders, and secure the flow of credit to our economy.

We have already delivered over half of these reforms, and we are firmly on track to deliver the rest working closely with industry and consumers.

The government has already banned mortgage exit fees from 1 July this year so consumers can now walk down the road and get a better deal.

We have legislated the introduction of a simple, standardised, one-page fact sheet for consumers to compare loans from 1 January next year.

We have passed historic reforms through the parliament to crack down on unfair treatment of Australians with credit cards and save them money.

I also recently announced a new 'tick and flick' service to give Australians the freedom to switch deposit accounts with the stroke of a pen.

The Gillard government has also put in place important measures to help smaller lenders compete with the major banks.

In April this year, I directed the AOFM to boost the government's investment in high-quality, AAA-rated RMBS by a further $4 billion.

The government's now $20 billion investment since late 2008 has been absolutely critical in helping smaller lenders secure cheaper funding.

This important program has allowed smaller Australian lenders to continue offering competitive loans to families and small businesses.

We are also taking action to build a fifth pillar in our banking system from the combined competitive power of our mutual sector.

We have already seen several mutual lenders out there leveraging our reforms to help them use the new term 'mutual bank' in the branding.

In addition, the government has already kicked off its community awareness and education campaign which I announced last December.

We have put credit unions, building societies and our regional and other smaller banks right at the centre of this awareness campaign.

It is all about informing consumers of the many safe and competitive alternatives to the major banks when it comes to loans and deposits.

It is fantastic to see our reforms have helped trigger a new breakout of competition in the banking sector to the benefit of consumers.

We have seen the major banks scrapping their exit fees, offering cash to swipe customers from their competitors and cutting other fees too.

Just recently we have seen them slashing their home loan fixed interest rates and one major bank promising to match its competitors' on price.

The big winner here is the everyday Australian family who now knows the power is in their hands when it comes to shopping for a better deal.

Sustainable funding

Last December, I also announced further reforms to secure the long-term safety and sustainability of Australia's financial system.

These reforms are critical to ensuring our banking sector can keep providing reasonably priced credit to households and small businesses.

I announced measures to develop a deep and liquid corporate bond market to further reduce our reliance on offshore wholesale funding.

We are well advanced in our delivery of these reforms which include trading Commonwealth Government Securities on a securities exchange.

The government is also making strong progress in finalising reforms to reduce red tape for corporate bonds issuance to retail investors.

We will continue to work with corporate issuers and investors to build a deep and liquid Australian corporate bond market.

On top of this, we continue to work on ways to make the RMBS market more sustainable and diverse for smaller lenders in the years to come.

In December, I tasked Treasury to accelerate its work on promoting smaller lender issuance of alternative-style RMBS 'bullet securities'.

These securities are more like 'regular bonds' than traditional RMBS and are therefore more attractive to superannuation fund investors.

The Treasury is making very strong progress in working with the industry and our regulators to develop the market for smaller lender bullet RMBS.

The bill I introduce today is all about taking the next logical step to strengthen the funding options available to our banking system.

The bill makes amendments to the Banking Act to allow Australian banks, credit unions and building societies to issue covered bonds.

This is a critical economic reform to strengthen and diversify the Australian financial system's access to cheaper, more stable and longer term funding in domestic and offshore wholesale capital markets.

Treasury estimates the government's framework will allow Australian institutions to issue some $130 billion of covered bonds in coming years.

Covered bonds will assist our banks in meeting the new Basel III liquidity reforms, which require a transition to longer term sustainable funding.

Of course, a deep and liquid covered bond market will also help to channel Australia's national superannuation savings through the financial system into productive investment in all sectors of our economy.

We have already seen banks from Canada and Norway coming down here to issue covered bonds and take our savings home with them.

It defies logic that our own banks can't issue the same covered bonds themselves to our local superannuation funds for Australian investors.

Allowing our institutions another string in their bow-to compete for funding with banks around the world-is an absolute no-brainer.

Covered bonds are already well established overseas, and were one of the most resilient funding markets during the global financial crisis.

The bill I present today will strengthen the long-term funding capacity of all major and regional banks, credit unions and building societies.

In fact, the bill includes an express framework which allows smaller lenders to pool together and jointly issue covered bonds.

This further builds on the measures I have outlined today which the government has already taken to diversify funding for smaller lenders.

The government's covered bonds framework ensures the absolute security of depositors' savings and protection of taxpayer funds.

Australian depositors will continue to have absolute certainty over their deposits under the Financial Claims Scheme.

On Sunday, I announced a new, permanent cap of $250,000 per person per institution to be introduced from 1 February 2012 to protect the savings held in around 99 per cent of Australian deposit accounts in full.

The scheme was developed over the period leading up to the global financial crisis by our financial regulators.

The government accelerated its introduction to secure confidence after the severe dislocation of global funding markets following the collapse of Lehman Brothers in late 2008.

The timely introduction of the scheme, combined with the wholesale funding guarantee, helped ensure the stability of our banking system at the height of the global financial crisis.

These decisive actions maintained the continued flow of credit-the life blood of any modern economy-to Australian households and business.

Together with both fiscal and monetary policy stimulus, this action saw Australia as virtually the only developed country to avoid recession.

At that time, the government committed to review the settings of the scheme after three years.

Australia's credit unions, building societies and banks are highly capitalised, well-rated and have benefited from years of tough supervision by our world-class regulators.

Our institutions are very soundly managed by international standards, having developed strong practices of responsible lending and risk management.

They are very well funded for the period ahead, having done a lot of heavy lifting to reduce the amount of funds they borrow offshore as they move to more stable, longer-term funding.

The Council of Financial Regulators has advised that the cap should be set at a new, permanent level to reflect the almost unparalleled strength of the Australian banking system.

In the extremely unlikely event of the Scheme being activated, the government would step in and swiftly give depositors their money.

The government would then sell the assets of the institution to recover taxpayers' money and in the extremely unlikely event that there wasn't enough would levy the whole banking system to recover any shortfall.

So Australian household depositors and taxpayers are always protected.

As an additional protection, this bill includes a regulatory cap on the amount of covered bonds an institution can issue.

This regulatory cap ensures that only a small proportion of an institution's assets in Australia are ever used as security for issuing covered bonds.

Specifically, the pool of assets used to secure covered bond issuance can be no greater than eight per cent of an institution's assets in Australia.

This further reduces the likelihood that a levy on the banking industry would ever even be required under the scheme, as the sale of an institution's assets would almost certainly recover taxpayers' funds.


The Gillard government is working hard to build a more competitive and sustainable banking system for all Australians.

We worked hard through the global financial crisis to secure our financial system, and preserve the competitive foundations of our banking sector.

In December last year, I announced a further reform package to help build up competition again in the banking system for all Australians.

We have already seen these reforms deliver great results for consumers, with the major banks now having to compete hard for their business.

The challenge now is to ensure that our banks, credit unions and building societies have the capacity to safely lend for the decades to come.

The bill I present today is the next logical step in that process.