A push by banks to persuade the Australian Prudential Regulation Authority to permit issuance of covered bonds has failed, with APRA announcing yesterday that it would maintain its policy that covered bonds do not meet its prudential standard for securitisation.A notice from the regulator said it had received proposals for issuance of covered bonds from banks keen to expand their sources of funds. The notice said: "APRA has carefully considered the latest proposal against the background of recent global credit market developments."In our view and notwithstanding market developments, the arguments advanced in support of such structures do not adequately address APRA's in-principle objection to covered bonds."A covered bond differs from an RMBS or other asset-backed security in that the contractual maturity of the issue is realised. As mortgages are paid out and leave the pool the issuer tops up the pool with new mortgages.The "cover pool" of the issuer's assets is held by the issuer, or in a separate vehicle for the benefit of the bond investors in the event the issuer is unable to meet its obligations on the debt instruments. The European covered bond market is a big debt capital market for banks and has remained liquid over the past year.The Australian Financial Markets Association had led a campaign to persuade APRA to review its regulation and consider arrangements in place in markets such as the United States, where covered bond issuance is permitted.APRA's view is that the structure subordinates the interests of depositors to the interests of the covered bond holders. The Banking Act requires that if a deposit-taking institution becomes unable to meet its obligations the assets of the ADI are to be available to its deposit liabilities ahead of all other liabilities.APRA said yesterday that other synthetic or structured transactions that were in economic substance equivalent to covered bonds would not be acceptable.