Covered bond cap set at eight per cent of assets

The Australian Government will set the cap on the percentage of assets that can be used to support covered bonds at eight per cent, the Financial Review reports - up from the cap of five per cent suggested by the Government back in December.

For some weeks, talk in banking and government circles has indicated a higher cap was likely. The corresponding cap in New Zealand will be 10 per cent of assets.

The Government will introduce the bill to enable banks to sell covered bonds into Parliament today. This requires an amendment to the Banking Act to override the existing depositor preference provisions.

Covered bonds, which involve banks pledging pools of assets as security to investors in wholesale debt, are widely used by banks in Europe as a wholesale funding option. Banks in Australia are anxious to make use of this option. They are a more flexible instrument than another alternative - the securitisation of asset pools - which requires a clean sale of assets to a separate trust.

Assets eligible for use in covered bonds will be residential mortgages, government bonds and cash.