Fitch applauds government changes
(29 March 2011 – Australia) Ratings agency Fitch believes the governments covered bonds proposal will help stimulate competition and relieve funding issues.
Earlier this month, the federal government requested that the Banking Act 1959 be amended to allow banks to undertake covered bond issuance.
Under the proposed amendments, a special purpose vehicle would have ownership of the cover pool assets, removing them from the depositor protection regime.
If these assets are insufficient to satisfy the debt, the covered bond holders would rank alongside other senior unsecured creditors (and behind depositors) of the bank for the shortfall.
'Allowing banks to issue covered bonds will aid funding diversity for Australia's banking system and partly address one of its key vulnerabilities: a reliance on offshore wholesale funding markets,' Fitch's Financial Institutions group director Tim Roche said.
'Given they are a cost-effective method of issuing long-term debt, covered bonds should also assist Australian banks in meeting the requirements of the net stable funding ratio under Basel III."
Assets that are eligible for cover pools include: first mortgages over residential and commercial property, as well as cash, government securities, and derivatives for the sole use of hedging foreign currency or interest rate movements between the cover assets and the covered bonds. For residential mortgages, only assets with a loan-to-valuation (LTV) ratio below 80 percent at origination are eligible; this cap falls to 60 percent for commercial mortgages.
Under the proposed amendments, a special purpose vehicle would have ownership of the cover pool assets, removing them from the depositor protection regime.
If these assets are insufficient to satisfy the debt, the covered bond holders would rank alongside other senior unsecured creditors (and behind depositors) of the bank for the shortfall.
'Allowing banks to issue covered bonds will aid funding diversity for Australia's banking system and partly address one of its key vulnerabilities: a reliance on offshore wholesale funding markets,' Fitch's Financial Institutions group director Tim Roche said.
'Given they are a cost-effective method of issuing long-term debt, covered bonds should also assist Australian banks in meeting the requirements of the net stable funding ratio under Basel III."
Assets that are eligible for cover pools include: first mortgages over residential and commercial property, as well as cash, government securities, and derivatives for the sole use of hedging foreign currency or interest rate movements between the cover assets and the covered bonds. For residential mortgages, only assets with a loan-to-valuation (LTV) ratio below 80 percent at origination are eligible; this cap falls to 60 percent for commercial mortgages.
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