Greens voice concerns over covered bonds
(25 March 2010 – Australia) Greens' banking spokesperson, Adam Bandt MP, says that he is concerned about the Government's proposal to allow banks to issue covered bonds.
'Covered bonds will effectively shift risk from the large banks to the public purse and uninsured depositors' Mr Bandt said.
'Australian depositors are expected to feel secure about covered bonds because of the Government's Financial Claims Scheme. But this is simply asking the taxpayer to carry a risk currently borne by the banks.'
'And what about people whose deposits are above the cap guaranteed by the claims scheme? What happens when the cap is reviewed downwards this year, as anticipated?'
'Covered bonds will not benefit small and community banks to the same degree as the big banks.'
'Covered bonds may in fact entrench the large banks' market dominance, as smaller banks are unlikely to be able to access the covered bond market on the same scale, if at all.'
'I remain to be convinced that this will make home loans cheaper. Diversification of bank funding sources won't in and of itself result in cheaper products. In fact, the cost of lower-ranking securities may become more expensive as they become riskier. '
Mr Bandt was also sceptical of suggestions that this would help reduce dependence on foreign funds, as claimed by NAB's Cameron Clyne.
'It would come as no surprise if covered bonds ultimately resulted in banks borrowing more money from overseas for the purpose of expanding the domestic property sector.'
'This comes on top of what the IMF has calculated to be on average a 20 basis point subsidy given by the public to the large banks through the existing implicit 'too big to fail' policy.'
'There is one lesson from the GFC that banks seem to have learned quite well: this Government can be called upon to share their risks without a fair quantum being demanded in return.'
Over the coming weeks I will be meeting with a number of banks and will be interested to hear their views on this proposed reform.
Mr Bandt said that the Greens would carefully evaluate the proposed legislation before it comes to Parliament and be seeking a briefing from Treasury next week.
Covered bonds are instruments issued by banks to bondholders and secured by high quality assets. Part of their attractiveness to bondholders is that they will outrank depositors in any claim on bank assets. This would involve a fundamental change to Australian banking laws: currently depositors have the highest claim on assets.
'Australian depositors are expected to feel secure about covered bonds because of the Government's Financial Claims Scheme. But this is simply asking the taxpayer to carry a risk currently borne by the banks.'
'And what about people whose deposits are above the cap guaranteed by the claims scheme? What happens when the cap is reviewed downwards this year, as anticipated?'
'Covered bonds will not benefit small and community banks to the same degree as the big banks.'
'Covered bonds may in fact entrench the large banks' market dominance, as smaller banks are unlikely to be able to access the covered bond market on the same scale, if at all.'
'I remain to be convinced that this will make home loans cheaper. Diversification of bank funding sources won't in and of itself result in cheaper products. In fact, the cost of lower-ranking securities may become more expensive as they become riskier. '
Mr Bandt was also sceptical of suggestions that this would help reduce dependence on foreign funds, as claimed by NAB's Cameron Clyne.
'It would come as no surprise if covered bonds ultimately resulted in banks borrowing more money from overseas for the purpose of expanding the domestic property sector.'
'This comes on top of what the IMF has calculated to be on average a 20 basis point subsidy given by the public to the large banks through the existing implicit 'too big to fail' policy.'
'There is one lesson from the GFC that banks seem to have learned quite well: this Government can be called upon to share their risks without a fair quantum being demanded in return.'
Over the coming weeks I will be meeting with a number of banks and will be interested to hear their views on this proposed reform.
Mr Bandt said that the Greens would carefully evaluate the proposed legislation before it comes to Parliament and be seeking a briefing from Treasury next week.
Covered bonds are instruments issued by banks to bondholders and secured by high quality assets. Part of their attractiveness to bondholders is that they will outrank depositors in any claim on bank assets. This would involve a fundamental change to Australian banking laws: currently depositors have the highest claim on assets.
Subscribe