The introduction of covered bonds in Australia could see a revival of the securitisation market, as they help banks to move away from government-guaranteed bonds to more market-reliant funding methods.
Australian banks are now predominantly using government-guaranteed bonds to raise capital and investors have been keen buyers of these new bonds.
There was a role for covered bonds in facilitating the transition and their use would also help restore investor confidence in the embattled securitisation market, newly-appointed Australian Securitisation Forum chairman Stuart Fuller said.
"It could allow the market to see covered bonds as a transition away from government-guaranteed funding to more normal types of funding," Fuller said.
Covered bonds are debt securities issued by a bank and are backed by mortgages or public sector loans. They are much like asset-backed securities created in securitisation, but the loans backing a covered bond remain on the balance sheet of the bank.
Mortgage and asset-backed securities, on the other hand, are mostly off-balance sheet transactions in which lenders sell the loans and thereby remove the risk associated with those loans.
The United States introduced legislation in July last year to kick-start a market for covered bonds in an attempt to provide an alternative form of mortgage-backed securities. It was hoped Australia would soon follow suit, Fuller said.
"APRA (Australian Prudential Regulatory Authority) to date in Australia has said it doesn't believe it is consistent with the positive protection regime of our Banking Act for our banks to issue covered bonds and segregate collateral in that way," he said.
However, an inquiry into banking and non-banking sector competition last year prompted the inquiry's committee to recommend Australian banks be allowed to issue covered bonds.
