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Banks and other deposit taking institutions could reduce the cost of funding under new laws.
The federal government is expected to propose new laws today that will allow lenders to issue covered bonds up to a limit of 8 per cent of their assets.
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The new law will form part of Treasurer Wayne Swan’s proposed banking reforms and are expected to create a more transparent and reliable source of debt funding for Approved Deposit Institutions.
According to Gadens Lawyers, in the past arguments against the use of covered bonds in Australia have been expressed by the Australian Prudential Regulation Authority on the basis that Cover Pool assets potentially leave ADIs without the means to meet liabilities owed to depositors, in contravention of depositor preference obligations under section 13A(3) of the Banking Act 1959, and potentially place stress on the asset base of Australian ADIs.
A statement by Gadens said while the new law could ultimately benefit lenders, by helping them reduce their funding costs, as with most changes to legislation the devil will be in the detail.
