Australia’s Senate Passes Legislation Allowing Covered Bonds

Australia’s upper house Senate passed legislation today allowing the nation’s financial companies to sell covered bonds, a move the Treasury estimates may lead to A$130 billion ($132 billion) of sales.

The legislation, introduced to parliament last month by Treasurer Wayne Swan, will amend the nation’s Banking Act to allow domestic lenders to sell the debt for the first time. It was passed yesterday in the lower house of parliament.

“Covered bonds offer banks access to a more diverse and larger funding base, the potential for longer tenor issuance and a prospective reduction in funding costs,” said David Goodman, Sydney-based Westpac Banking Corp.’s director of asset-backed securities. “If pricing is similar to overseas markets, spreads on covered bonds may be around a third less than on senior unsecured debt.”

While offshore banks have been allowed to sell covered notes in Australia, the ban meant domestic lenders were unable to access cheaper funding in a nation with the highest interest rates in the developed world. Covered bonds, which typically have the highest credit rating, are backed by assets that stay on the bank’s balance sheet and can be sold in a default.

“All Australian banks, credit unions and building societies, and ultimately their customers, will benefit from the issuance of covered bonds,” Swan’s office said in an e-mailed statement today.

To contact the reporters on this story: James Paton in Sydney at jpaton4@bloomberg.net; Sarah McDonald in Sydney at smcdonald23@bloomberg.net

To contact the editor responsible for this story: Edward Johnson at ejohnson28@bloomberg.net

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