Proposed changes to Australia’s covered bond regulations could unlock up to $65 billion in additional issuance capacity for Australian banks, according to Fitch Ratings, potentially expanding the domestic fixed-income market and improving funding options for smaller lenders.
The Federal Government has released draft regulations to increase the covered bond issuance cap from 8 per cent to 12 per cent of Australian banks’ domestic assets, a move designed to improve access to stable, lower-cost wholesale funding.
The proposed reforms follow recommendations from the Council of Financial Regulators’ review of small and medium-sized banks, which found that increasing the cap would improve access to longer-term funding, particularly for mid-tier institutions.
Covered bonds are debt securities backed by pools of high-quality assets, typically residential mortgages. They provide investors with additional security while allowing banks to access funding at potentially lower costs than unsecured debt.
Fitch Ratings said the proposed increase could expand Australian banks’ covered bond issuance capacity by as much as 50 per cent, assuming existing asset buffer practices are maintained.
The ratings agency estimates the changes could provide approximately $65 billion in additional issuance capacity, compared with current annual covered bond issuance of around $30 billion.
Fitch said the reforms would support expanded issuance and broaden market access, particularly for medium-sized banks whose smaller asset bases can constrain covered bond programs.
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However, it expects banks to continue maintaining substantial eligible-asset buffers to preserve funding flexibility during periods of market disruption.
Fitch also indicated the changes were unlikely to materially affect its assessment of Australian banks’ funding, liquidity or credit ratings.
The Australian Banking Association (ABA) welcomed the proposal, arguing that greater access to competitive wholesale funding would strengthen competition across the banking sector.
ABA chief executive Simon Birmingham said lifting the cap would give smaller lenders greater flexibility.
“Lifting the cap means small and mid-tier banks have more room to price competitively and invest in better services, which is good for competition and good for customers,” Mr Birmingham said.
The covered bond proposal forms part of a broader Federal Government financial sector reform package, which Treasury estimates will reduce regulatory compliance costs by $780 million annually.
Treasurer Jim Chalmers said the reforms would improve competition and productivity while maintaining financial stability.
The Government has opened consultation on the proposed changes, with implementation expected to begin later this year.
