Covered bonds and depositor protection

The Australian Securitisation Forum has been promoting covered bonds as a new type of security (and a potential source of funding) for ADI’s for some time (see here).

Joe Hockey listed covered bonds as an issue to be resolved as point number 8 in his recent 9 point plan.

What are the legal problems with issuing covered bonds?

Covered bonds issued by an ADI would give investors security and first priority over a particular pool of assets. They would have priority over the depositors in the event of insolvency of the ADI.

On 29 April 2008 APRA wrote to ADIs stating ” In APRA’s view, such structures are not consistent with the provisions of the Banking Act 1959 requiring that, if an ADI becomes unable to meet its obligations or suspends payment, the assets of the ADI in Australia are to be available to meet that ADI’s deposit liabilities in Australia in priority to all other liabilities of the ADI.” (see letter here)

Paragraph 7 of APS 120 prohibits the issue of covered bonds and APRA indicated the prohibition will continue to apply.

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