Outline of
chapter
1.1
This Banking Amendment (Covered
Bonds) Bill 2011 (this Bill) amends the Banking
Act 1959 to enable ADIs, which includes banks, credit unions and
building societies, to issue covered bonds. This measure was announced by the Deputy
Prime Minister and Treasurer on 12 December 2010.
Context of
amendments
What is a
covered bond?
1.2
A covered bond is a dual‑recourse bond (or secured
debt instrument) issued by banking institutions (which in Australia are ADIs).
The ADI issuing the covered bond has an ongoing obligation to make principal
and interest repayments to covered bondholders (that is, the investors).
1.3
The dual‑recourse nature of covered bonds comes
from the fact that covered bondholders have two mechanisms to recoup their
investment in the event that the issuing ADI is in default (that is, the ADI
does not meet its payments to covered bondholders). The covered bondholders firstly
have recourse to the ADI, and should the ADI not meet its contractual
obligations, the covered bondholders have recourse to a specified pool of high
quality assets (called the cover pool of assets). If the cover pool of assets
is insufficient to meet the covered bondholders claim, then the covered
bondholders retain recourse back to the issuing ADI for any outstanding
residual amounts due to them. Any residual claim of covered bondholders on the
ADI would rank below most depositors and claims by government.
1.4
Issuers of covered bonds generally seek a AA or AAA
credit rating for the covered bond issue. Further, the rating of the covered
bond issues is typically higher than the credit rating of the issuing ADI
reflecting the dual‑recourse nature of covered bonds and the high quality of
the asset pool securing the covered bonds. In addition, many covered bond
markets (particularly in Europe) are heavily regulated which has the effect of
protecting the interests of covered bondholders, and supporting a higher‑than‑otherwise
credit rating of covered bond issues.
Diagram 1.1
: Illustration of a covered bond and comparison with other securities
1.5
The recourse to the ADI issuing bonds and the pool
of assets securing covered bondholders (and the consequent retention of credit
risk by the ADI issuer) distinguishes covered bonds from other asset‑backed
securities (such as residential mortgage‑backed securities (RMBS)) where the
credit risk held by the holder of the security is on the pool of assets only. The
dual‑recourse nature of covered bonds also differs from ADI wholesale funding
where the claim is only against the issuer (that is, the claim is not secured
against any particular assets of the issuing ADI). This is illustrated in
Diagram 1.1 above.
Current law
1.6
The preference provisions in the Banking Act 1959 have impeded ADIs issuing
secured debt, such as covered bonds. These provisions have historically ensured
that depositors in Australia have the first claim (that is, ahead of all other
creditors, including secured creditors) on all of an ADI’s Australian assets. However,
in October 2008, the Government introduced a new protective framework for
depositors called the Financial Claims Scheme (FCS) which ensures (currently
and once the cap is changed) that 99 per cent of Australian deposit accounts
are protected in full.
Protection
for depositors
1.7
Under the FCS, the Australian Government protects
most depositors up to a cap (which is currently set at $1 million but will
change to $250,000 from 1 February 2012 as announced by the Government on 11
September 2011), and will fully pay these depositors in the unlikely event that
an ADI fails. The FCS ensures (currently and once the cap is changed) that 99
per cent of Australian deposit accounts are protected in full. Further, the
Australian Government confirmed on 12 December 2010 as part of its
Competitive and Sustainable Banking package that the FCS is a permanent feature
of Australia’s banking landscape. This Bill makes no amendments to the
legislation governing the operation of the FCS.
1.8
In the unlikely event of the FCS being activated, and
the even more unlikely event that the sale of a failed ADI’s assets be
insufficient to recover taxpayer funds in full, the FCS allows the Australian
Government to levy the banking industry afterwards to recover any outstanding
amount. This means Australian taxpayers are fully protected.
1.9
Further, as an additional protection for
depositors, this Bill includes a regulatory cap on the amount of covered bonds
an ADI can issue. This regulatory cap ensures that only a small proportion of
an ADI’s assets in Australia are included in a cover pool (or cover pools) for
the benefit of covered bondholders in priority of the ADI’s other creditors in
Australia. The regulatory cap on the issuance of covered bonds further reduces
the likelihood that a levy on the banking industry would ever be required under
the FCS.
Benefits of
the covered bond measure
1.10
Allowing ADIs to issue covered bonds may assist them
in their funding task in four respects.
1.11
First, covered bonds diversify an ADI’s funding
base. They allow ADIs to issue a new class of securities which may be
attractive to a new class of investors who wish to bear less risk relative to
other forms of bank funding. Consequently, having the capacity to issue
covered bonds will improve ADIs’ access to funding.
1.12
Second, covered bonds offer a potentially cheaper
form of wholesale funding for ADIs, because the risk to investors associated
with covered bonds is generally lower than other forms of wholesale funding.
1.13
Thirdly, covered bonds may provide the opportunity
to raise funds with longer maturity, say with a 5 to 15 year term. This
compares with ADI wholesale funding which is typically in the maturity range of
up to 4 years, although ADIs could issue longer‑dated paper if they wish to do
so and there is investor appetite. Lengthening the term of funding can be beneficial
for ADIs as longer‑term funding more closely aligns the maturity profile of an ADI’s
liabilities with the maturity profile of an ADI’s assets (that is, loans). Further,
any shift towards long‑term funding has stability benefits for the Australian
banking system and will assist ADIs to meet the international regulatory
reforms to bank liquidity requirements.
1.14
Finally, covered bonds are typically structured
with repayment of the principal at the maturity date (that is, a bullet
security). In contrast, securitisation vehicles like RMBS typically have the
principal repaid in instalments over time (in line with repayment of the underlying
assets which can be uncertain). This makes covered bonds potentially more
attractive to investors such as superannuation funds seeking more predictable
returns relative to some securitisation products.
Summary of
new law
1.15
The following provides a summary of the covered
bond framework set out in this Bill.
• ADIs issuing covered bonds: ADIs are able
to issue covered bonds subject to complying with the requirements of this Bill.
• Cap on covered bond issuance: The issuance
of covered bonds by an ADI is limited by a cap placed on the value of assets
contributed by an ADI to the cover pool of assets. This cap is set at 8 per
cent of an ADI’s assets in Australia. This cap prevents covered bondholders
having a claim over more than 8 per cent of an ADI’s assets in Australia at the
point of issuance of covered bonds. In effect, this cap limits the
subordination of unsecured creditors such as depositors arising from the
preferred claim on assets securing the ADI’s liabilities to covered bondholders.
• Ring‑fencing the cover pool of assets: The
cover pool of assets providing security to covered bondholders and service
providers needs to be held by a covered bond special purpose vehicle. The covered
bond special purpose vehicle beneficially owns the cover pool assets. .
• Australian Prudential Regulation Authority’s powers:
The Australian Prudential Regulation Authority (APRA) has the power to restrict
the issuance of covered bonds where, inter alia, the ADI has not complied with
the covered bond legislation. APRA has no direction making powers over assets
held by the special purpose vehicle for the benefit of covered bondholders and
service providers. However, APRA has a power to provide a direction in respect
of assets held by the covered bond special purpose vehicle which are not for
the benefit of covered bondholders and service providers.
• Eligible assets: The eligible assets which
can be included in the cover pool are specified in this Bill. These assets are
essentially high quality assets (such as residential mortgages).
• Maintenance of the cover pool: The ADI is
required to maintain the cover pool of assets so that the value of these assets
is sufficient to meet 103 per cent of the face value of the outstanding covered
bonds. This may involve the ADI transferring additional assets to the cover
pool and/or replacing assets in the cover pool over time. APRA has the power
to prevent an ADI maintaining the cover pool in particular circumstances, such
as the ADI being in financial difficulties.
• Cover pool monitor: The ADI issuing the
covered bonds is required to appoint a cover pool monitor. The functions of
the cover pool monitor include assessing the maintenance of a register of
assets in the cover pool and the ADI’s compliance with maintaining the value of
the cover pool. The cover pool monitor is also required to report on the
status of the cover pool every six months.
• Winding up the cover pool: In the event of
resolving a failing ADI, an ADI statutory manager or external administrator has
no powers over assets held by the covered special purpose vehicle for the benefit
of covered bondholders and service providers apart from pursuing any of the ADI’s
contractual claims on the covered bond special purpose vehicle. This supports
the principle that the resolution process relating to a failing ADI and the resolution
process relating to the covered bond special purpose vehicle should be separate
from each other.
• Arrangements involving several ADIs: This
Bill allows a group of ADIs to enter into an arrangement to facilitate the
issuing of covered bonds.
• Prudential standards: APRA is able to set
prudential standards with respect to the issuance of covered bonds by ADIs. Further,
this Bill provides guidance to APRA in setting these prudential standards. In
particular, assets in the cover pool are to be treated as assets of the ADI
provided that assets in the cover pool are no more than 8 per cent of the ADI’s
assets in Australia. APRA may impose different (more stringent) prudential
requirements on any assets over the 8 per cent cap.
Detailed
explanation of new law
1.16
Schedule 1 of this Bill amends the Banking Act 1959 to allow ADIs to issue
covered bonds and establishes a regulatory framework for covered bonds issued
by ADIs.
Coverage of
covered bond legislation
1.17
This Bill applies to ADIs regulated by APRA. However,
this Bill does not apply to foreign ADIs [Schedule 1, item 22, paragraph 25(a)].
In essence, a foreign ADI is a foreign owned bank incorporated overseas which
has been granted an authority to carry on banking business in Australia but is
not permitted to accept retail deposits (currently set at amounts less than $250,000)
from individuals and non‑corporate institutions. A foreign ADI is not subject
to the depositor preference provisions (that is, Division 2) of the Banking Act 1959. A foreign owned bank incorporated
in Australia is an ADI as defined in the Banking
Act 1959, and is permitted to accept retail deposits in
Australia from individuals and non‑corporate institutions and is therefore
subject to the requirements set out in this Bill.
1.18
In addition, this Bill does not apply to covered
bonds issued by ADIs which are secured wholly by assets which are not assets in
Australia [Schedule 1, item 22, paragraph 25(b)].
That is, it does not apply to a foreign branch of an ADI which issues covered
bonds secured entirely by foreign assets.
Definitions
1.19
In this Bill, the term a ‘covered bond’ is defined as
a bond, note or debenture issued by an ADI where the liabilities to the covered
bondholders (that is, payment of principal and interest) are:
• recoverable
from the ADI issuing the covered bonds; and
• secured
by assets beneficially owned by a covered bond special purpose vehicle.
[Schedule 1, item 1, subsection 5(1) and item 22,
subsection 26(1)]
1.20
The term ‘covered bond special purpose vehicle’ is
defined in terms that its purpose must relate only to covered bonds [Schedule
1, item 4, subsection 5(1) and item 22, subsection 26(2)].
This Bill does not specify the legal form of the covered bond special purpose
vehicle, so it can be a trust or a company. In essence, the covered bond
special purpose vehicle would only hold assets linked in some way to an ADI
issuing covered bonds.
1.21
The covered bond special purpose
vehicle beneficially owning a pool of assets supports the key principle
underpinning a covered bond. That is, there is a clearly identifiable pool of
otherwise unencumbered assets which are solely devoted to meeting the claims of
covered bondholders. In the event of insolvency of the ADI, this pool of
assets is available to meet the claims of covered bondholders. In practice, this
means that the covered bond special purpose vehicle is bankruptcy remote from
the ADI issuing the covered bonds.
1.22
The covered bond special purpose vehicle may hold
assets for a range of purposes relating to the issue of covered bonds. This
includes assets securing liabilities to covered bondholders, service providers,
derivative counterparties and the issuing ADI.
1.23
The covered bond special purpose vehicle could also
hold trust back assets (that is, assets held by the covered bond special
purpose vehicle on trust for the ADI). Trust back assets are not held by the
covered bond special purpose vehicle for the benefit of covered bondholders and
service providers, but they are held by the covered bond special purpose
vehicle on trust for the ADI for administrative reasons. . This is because
trust back assets relate to an asset held for the benefit of covered
bondholders and service providers. For example, a mortgage over a house may
support loans other than just a housing loan provided as security for covered
bondholders. To ease administration of application of the mortgage security,
the interest in the mortgage is transferred to the covered bond special purpose
vehicle and provides security for both the housing loan which provides security
to covered bondholders and the other loans which do not providing security to
covered bondholders. The loans which do not provide security to covered
bondholders may also be transferred to the covered bond special purpose vehicle
for administrative reasons.
1.24
The term ‘cover pool’ is defined as
assets beneficially owned by the covered bond special purpose vehicle to the
extent that those assets secure liabilities to covered bondholders equally or in
priority to other liabilities [Schedule 1, item 3, subsection 5(1) and item 22,
subsection 26(3)]. The reference in subsection 26(3) to
‘other liabilities’ could mean liabilities of either the ADI or the covered
bond special purpose vehicle. In other words, the cover pool of assets
comprises those assets securing the covered bond special purpose vehicle’s liabilities
to covered bondholders and assets securing other liabilities of the covered
bond special purpose vehicle or liabilities of the ADI which rank equal or below
covered bondholders. Further, the cover pool does not include assets securing
liabilities which rank ahead of liabilities to covered bondholders.
1.25
The cover
pool of assets includes what the industry calls contractual over‑collateralisation.
Contractual over‑collateralisation is where the ADI is required to ensure under
the contractual arrangements that the value of assets in the cover pool secured
for the benefit of covered bondholders exceeds their claim by a particular
amount. For example, the ADI may be contractually obliged to maintain assets
equal to $110, while the liabilities of the covered bond SPV to covered
bondholders total $100. The covered bondholders would have a claim over the
additional assets ahead of the ADI, and consequently the value of the cover
pool of assets typically exceeds the amount owed to covered bondholders. The
commercial reason for providing over‑collateralisation is to enhance the credit
rating of the covered bond.
1.26
Another group of assets is what the industry calls voluntary
over‑collateralisation. Voluntary over‑collateralisation is where the ADI
voluntarily adds additional assets to the covered bond special purpose vehicle
as a ‘management buffer’ to ensure that the cover pool of assets never falls
below the contracted amount.
1.27
The cover pool of assets may or may not include
assets securing liabilities relating to voluntary over‑collateralisation, service
providers of the ADI and covered bond special purpose vehicle (for example, the
cover pool monitor), and derivative counterparties. This depends on where the
liabilities relating to voluntary over‑collateralisation, service providers and
derivative counterparties rank relative to liabilities to covered bondholders.
• If
assets securing liabilities relating to voluntary over‑collateralisation,
service providers and derivatives rank equally or behind covered bondholders,
then these assets are in the cover pool.
• If
assets securing liabilities relating to voluntary over‑collateralisation,
service providers and derivatives rank ahead of covered bondholders, then these
assets are not in the cover pool, and are subject to application of subsection
13A(3) in the Banking Act 1959
which provides priority to most depositors in Australia.
1.28
The term ‘covered bond liabilities’ of the ADI issuing
the covered bonds has two limbs. The first limb is that covered bond liabilities
of the ADI are liabilities to covered bondholders and any other liabilities
secured by assets beneficially owned by the covered bond special purpose
vehicle [Schedule 1, item 2, subsection 5(1) and item 22, subsection 26(4)].
Other liabilities of the covered bond special purpose vehicle would include
liabilities to services providers relating to the issue of covered bonds (such
as the cover pool monitor and derivative counterparties), and liabilities to
the ADI issuing the covered bonds (such as loans provided to the covered bond
special purpose vehicle so it can acquire assets from the ADI). However,
covered bond liabilities of the ADI does not capture trust back assets because
these assets do not secure liabilities of the covered bond special purpose
vehicle and because the covered bond special purpose vehicle does not
beneficially own these assets.
1.29
The second limb of the definition of covered bond
liabilities of the ADI excludes certain liabilities secured by assets held by the
covered bond special purpose vehicle. In particular, covered bond liabilities
of the ADI do not include liabilities of the covered bond special purpose
vehicle to the ADI, excluding liabilities relating to derivatives and provision
of services, which are secured by assets in priority to liabilities to covered
bondholders [Schedule 1, item 2, subsection 5(1) and item 22,
subsection 26(5)]. An example of a liability
which could be excluded under the second limb of the definition of covered bond
liabilities is voluntary over‑collateralisation. In particular, a liability
relating to voluntary over‑collateralisation (referred to by the industry as
the demand loan) is excluded from covered bond liabilities in the circumstance where
the ADI has a claim over the assets securing this liability in priority to
liabilities to covered bondholders.
Cover pool
monitor
1.30
A cover pool monitor must be appointed for each
cover pool [Schedule 1, item 22, subsection 30(1)].
The cover pool monitor must either:
• be
registered as an auditor under Part 9.2 of the Corporations
Act 2011;
• hold
an Australian financial services licence issued under the Corporation Act 2001 covering provision of
financial services as a cover pool monitor; or
• is
exempt from holding an Australian financial services licence under the Corporations Act 2001 covering provision
of financial services as a cover pool monitor.
[Schedule 1, item 22,
subsection 30(2)]
1.31
The most relevant exemption from holding a
Australian financial services licence is likely to be paragraph 911A(2)(h) of
the Corporations Act 2001. This
paragraph provides an exemption for an entity where the entity is regulated in
a foreign jurisdiction, obtains written approval from ASIC and the services being
provided are to wholesale investors.
1.32
This Bill specifies that the ADI issuing the
covered bonds cannot be the cover pool monitor of its own cover pool. Further,
the cover pool monitor cannot be an associated entity of the ADI issuing the
covered bond [Schedule 1, item 22, subsection 30(3)].
The ADI issuing covered bonds is identified by the term ‘issuing ADI’, which
links the ADI issuing the covered bonds with a particular cover pool and
covered bond special purpose vehicle. [Schedule
1, item 22, subsections 26(6)]
1.33
The meaning of an associated entity is the meaning
set out in section 50AAA of the Corporations
Act 2001. In essence, the cover pool monitor cannot be an entity
controlled by the ADI issuing the covered bond. This is to ensure that the
covered bond monitor is independent of the ADI issuing the covered bond. The
independence of the cover pool monitor is important because the board or
trustee of the covered bond special purpose vehicle is not required to be
independent of the ADI. The cover pool monitor is likely to be a firm in the
auditing business, or a firm with expertise in managing assets on behalf of
investors.
1.34
In essence, the role of the covered bond monitor is
to assess the issuing ADI’s compliance with meeting its obligations, and to
provide an opinion in respect this compliance. In particular, the cover pool
monitor’s role includes:
• assessing
the keeping of an accurate register of the assets in the cover pool by either
the issuing ADI or covered bond special purpose vehicle; and
• assessing
the issuing ADI’s compliance with the requirements in respect of the nature of
the assets in the cover pool, and the value of the cover pool of assets.
[Schedule 1, item 22,
paragraphs 30(4)(a)and (b)]
1.35
These functions may be performed by the cover pool monitor
with the aid of sampling methods in accordance with auditing standards made
under the Corporations Act 2001.
[Schedule
1, item 22, paragraph 30(7)]
1.36
In addition, the cover pool monitor’s role is to
provide reports in relation to the above matters to the issuing ADI (or
substitute entity), who in turn is required to make the reports available to covered
bondholders or their representatives [Schedule 1, item 22, paragraphs 30(4)(c)].
This report is to be provided at least every six months [Schedule
1, item 22, paragraphs 30(6)]. This time period
is consistent with what is proposed in the case of credit institutions in the
United Kingdom issuing covered bonds. The cover pool monitor may be required
to provide reports relating to the cover pool to APRA, should APRA make a request
in writing. [Schedule 1, item 22, paragraphs 30(4)(d)]
1.37
The cover pool monitor is required
to provide the issuing ADI and the relevant covered bond special purpose
vehicle (such as the covered bond trustee in the event the covered bond special
purpose vehicle is a trust) with any report it provides to APRA. [Schedule
1, item 22, subsection 30(5)]
1.38
A regulation‑making power is
provided to expand on the functions of the cover pool monitor. [Schedule
1, item 22, paragraph 30(4)(e)] There is nothing
in the legislation that would prevent the cover pool monitor agreeing to take
on additional responsibilities specified in contractual arrangements.
Structure of
covered bonds involving one ADI
1.39
Reflecting the above requirements, the covered bond
structure where the ADI issues the covered bond is illustrated in Diagram 1.2
(see next page).
1.40
Under this structure, the ADI issues the covered
bond to investors and receives the proceeds of the covered bond sale from
investors. The ADI makes the interest and principal payments to covered
bondholders. The ADI is required to establish a covered bond special purpose
vehicle. The ADI provides a loan to the covered bond special purpose vehicle
so that this entity can purchase the assets supporting the issue of covered
bonds from the ADI. The covered bond special purpose vehicle purchases and
holds these assets for the benefit of the covered bondholders and other
creditors of the covered bond special purpose vehicle. The ADI is required to
appoint a cover pool monitor to oversee the assets held by the covered bond
special purpose vehicle. The cover pool monitor is required to be independent
of the ADI.
Diagram 1.2: Covered bond structure
for a structure involving a single ADI
Covered bond
arrangements involving several ADIs
1.41
A feature of covered bonds in offshore
jurisdictions is their high credit rating. . This mainly stems from a high
quality and diverse pool of cover assets, from large regular issues and the
credit rating of the issuer. As a way to obtain these characteristics, smaller
ADIs can pool their assets together in order to issue covered bonds. This has
been done successfully in offshore jurisdictions. Providing a mechanism to do
this could facilitate smaller ADIs issuing covered bonds into the Australian
market in particular.
1.42
Consequently, this Bill provides a model for
entering into arrangements involving several ADIs. This model involves the
ADIs participating in the arrangement establishing a new entity, called the
aggregating entity. This entity would not be an ADI, and would issue a debt
instrument secured by covered bonds issued by each of the ADIs to the aggregating
entity [Schedule 1, item 22, subsection 27(1)]. In
essence, the aggregating entity aggregates the covered bonds issued by the ADIs
participating in the arrangement. The ADIs participating in this arrangement would
be subject to the same regulation applying to the case where there is only one ADI
in the arrangement relating to issuing covered bonds.
1.43
This arrangement involving a number of ADIs
establishing an aggregating entity is illustrated in the Diagram 1.3.
Diagram 1.3: Aggregation model
involving an aggregation entity
1.44
Regulations may prescribe other arrangements
involving several ADIs to facilitate the issuing of covered bonds. [Schedule
1, item 22, subsection 27(2)]
Restriction
on issuance of covered bonds
1.45
This Bill includes a regulatory cap on the amount
of covered bonds an ADI can issue. This regulatory cap ensures that only a
small proportion of an ADI’s assets in Australia are included in a cover pool
(or cover pools) for the benefit of covered bondholders in priority of the
ADI’s other creditors in Australia. Further, it limits the subordination of
the ADI’s unsecured creditors in Australia, including depositors. The
regulatory cap on the issuance of covered bonds also reduces the likelihood
that a levy on the banking industry would ever be required under the FCS.
1.46
This Bill specifies that the regulatory cap on the
value of the cover pool of assets is set at 8 per cent of an ADI’s assets in
Australia [Schedule 1, item 22, section 28].
The numerator in this calculation is the aggregate value of assets in all the
cover pools the ADI has contributed to. As mention above, the numerator, that
is, the cover pool, includes assets relating to contractual over‑collateralisation.
1.47
The denominator in the calculation, that is, the
value of assets in Australia, will need to be estimated at an appropriate point
in time. APRA has the power to provide a prudential standard in respect of
this matter.
1.48
The 8 per cent cap is tested immediately before the
issuance of a new covered bond. That is, if issuing the new covered bonds results
in the cap being exceeded, then the ADI is not permitted to issue those new covered
bonds. This means that the regulatory cap is tested at a particular point in
time rather than continuously through time. This approach to setting the
regulatory cap provides ADIs with flexibility in managing their asset portfolio.
Further, this approach does not prevent an ADI transferring assets to the cover
pool after issuance of the covered bonds even if this transfer would cause the
8 per cent cap to be exceeded.
1.49
This Bill also specifies that APRA may direct an
ADI not issue a covered bond [Schedule 1, item 22, subsection 29(1)].
The circumstances where this power could be used are where:
• APRA
has reason to believe that the ADI has not complied with Division 3A of the Banking Act 1959 (which deals specifically
with ADIs issuing covered bonds);
• APRA
has reason to believe that the ADI has not complied with any other legislative requirements
in the Banking Act 1959, a
prudential regulation or prudential standard in respect of issuing covered
bonds; or
• APRA
has issued the ADI a direction under section 11CA of the Banking Act 1959.
[Schedule 1, item 22,
subsection 29(2)]
1.50
APRA is required to provide any direction as a
written notice to the ADI. This Bill indicates that this notice is not a
legislative instrument [Schedule 1, item 22, subsection 29(3)].
Subsection 29(3) is included to clarify that this notice is not a legislative
instrument within the meaning of section 5 of the Legislative Instruments Act 2003. This approach is
consistent with the approach used elsewhere in the Banking Act 1959 (for example, see section 13BA(3) and
section 13E of the Banking Act 1959).
1.51
This Bill includes a number of provisions dealing
with administrative matters in respect of APRA’s directions‑making powers
relating to covered bonds. These provisions are the same as those provisions
in section 11CA of the Banking Act 1959
which also deals with APRA’s directions‑making powers. These provisions
include the following:
• The
direction may deal with the time by which, or period during which, it is to be
complied with [Schedule 1, item 22, subsection 29(4)].
• The
ADI is required to comply with the direction despite anything in its
constitution or any contract or arrangement to which it is a party [Schedule
1, item 22, subsection 29(5)].
• APRA
may, by notice in writing to the ADI, vary the direction if, at the time of the
variation, it considers that the variation is necessary and appropriate [Schedule
1, item 22, subsection 29(6)].
• The
direction has effect until APRA revokes it by notice in writing to the ADI. APRA
may revoke the direction if, at the time of revocation, it considers that the
direction is no longer necessary or appropriate [Schedule 1, item 22, subsection 29(7)].
• APRA’s
decision to issue a direction in respect of covered bonds is subject to review by
the Administrative Appeals Tribunal as set out in Part VI of the Banking Act 1959 [Schedule
1, item 22, subsection 28(8)].
• Information
relating to directions and revocations of directions under this section is
subject to the secrecy requirements in Part 6 of the Australian Prudential Regulation Authority Act 1998, unless
the information has been published in the Gazette under section 11CE of the Banking Act 1959 [Schedule
1, item 22, subsection 29(9)].
• The
power for APRA to provide a direction in respect of covered bonds does not limit
any other powers of APRA to give directions [Schedule 1, item 22, subsection 29(10)].
1.52
This Bill also makes a number of consequential
amendments to the general provisions relating to APRA issuing directions to
ensure that these provisions also apply to any direction issued by APRA in
respect of covered bonds. These amendments include a reference in the relevant
places to the new section 29 in the Banking
Act 1959. [Schedule 1, items 6,10 to 17, 20, 21 and 23, subparagraph
9A(2)(a)(ii), subsections 11CD(1A), subsection 11CD(2), subsection 11CD(3),
subsections 11CE(1) and (2), paragraphs 11CE(3)(a) and (b), subsections 11CE(4),
paragraphs 11CG(1)(b) and (2)(a), subsection 11CG(2A), paragraph 14B(1)(a), subparagraph
16BA(6)(a)(iii) and subparagraph 62A(1B)(a)(ii)]
Eligible
assets that can be included in cover pools
1.53
This Bill specifies the types of assets which can
be included in the cover pool. The reason for doing this is that the assets in
the cover pool need to be of sufficient quality to give investors confidence in
the timely payment of claims attaching to the covered bond in the event the ADI
issuing the covered bonds fails. That is, regulation of the assets eligible to
be included in the cover pool provides increased certainty and confidence to
investors, and assists in obtaining the highest possible credit ratings. The
approach adopted in this Bill is consistent with the approach adopted in other
countries.
1.54
Eligible assets which can be included in the cover
pool include:
• an
at call deposit held with an ADI and convertible into cash within 2 business
days;
• bank
accepted bills or certificates of deposit not issued by the ADI issuing the
covered bonds that are eligible for repurchase transactions with the Reserve
Bank and mature within 100 days;
• a
government debt instrument issued by the Commonwealth, a State or a Territory;
• a
loan secured by a residential property;
• a
loan secured by a commercial property;
• a
contractual right relating to the holding or management of another asset in the
cover pool (for example, a mortgage insurance policy and a right for
compensation in the event the ADI does not meet any of its contractual
obligations in respect to managing the assets in the cover pool); and
• a
derivative (within the meaning of section 761D of the Corporations Act 2011) used for the
purposes of protecting the value of another asset in the cover pool, hedging
risks in relation to another asset in the cover pool and liabilities secured by
assets in the cover pool.
[Schedule 1, item 22, paragraphs 31(1)(a) to (h)]
1.55
This Bill includes a regulation making power to add
other assets to this list [Schedule 1, item 22, paragraph 31(1)(i)].
This regulation making power is not limited by the kind of assets listed in this
Bill (as set out above) [Schedule 1, item 22, subsection 31(2)].
Further, this Bill includes a regulation making power to remove assets from the
list. [Schedule 1, item 22, subsection 31(3)]
1.56
One of the functions of the cover pool monitor is
to assess the ADI’s compliance with this requirement [Schedule
1, item 22, paragraph 30(4)(b)]. APRA also has
the power to request reports in respect of assets held in the cover pool. [Schedule
1, item 22, paragraph 30(4)(d)]
Maintenance
of the cover pool
1.57
One of the key requirements of a covered bond is
that the ADI issuing the covered bond has an ongoing obligation to maintain the
value of assets in the cover pool. Many countries set a legislative minimum
level of over‑collateralisation to provide comfort to investors that there will
be sufficient assets in the cover pool to meet the claims of covered
bondholders.
1.58
Accordingly, this Bill specifies that the value of
assets in a cover pool must be at all times at least equal to 103 per cent of
the face value of covered bonds secured by that cover pool. Over‑collateralisation
of 3 percentage points is broadly similar to the minimum benchmark set in
a number of European countries. The minimum amount of 103 per cent can be
changed by regulation. [Schedule 1, item 22, subsection 31A(1)]
1.59
The implication of the requirement to maintain the
value of the cover pool of assets is that the issuing ADI may be required to
transfer additional assets to the cover pool and/or replace existing assets in
the cover pool with new assets to ensure compliance with this requirement.
1.60
This Bill specifies that the ADI cannot comply with
the requirement to maintain the cover pool in circumstances where APRA has
issued the ADI a direction under the Banking
Act 1959 [Schedule 1, item 22, subsection 31A(5)].
This direction would prevent the ADI transferring additional assets to the cover
pool and/or replacing existing assets in the cover pool with new assets.
1.61
This is given effect by making a minor amending
subsection 11CA(2) of the Banking Act 1959.
This subsection specifies the kind of directions APRA may give in respect of an
ADI, an authorised non‑operating holding company and any of their subsidiaries.
The amendment adds the words ‘or asset’ to paragraph 11CA(2)(n) of the Banking Act 1959. This has the effect
that APRA may direct an ADI not to transfer any amount or asset to a cover pool
held by a covered bond special purpose vehicle [Schedule 1, item 7, paragraph
11CA(2)(na))]. A consequential amendment subsection
11CA(2) to ensure consistency with the amendment to paragraph
11CA(2)(n). [Schedule 1, item 8, subsection 11CA(2)]
1.62
Subsections 11CA(1) and (1AA) of the Banking Act 1959 sets out the
circumstances where APRA may issue a direction of this kind. These
circumstances include when APRA has reason to believe that, inter alia, the ADI
is unable to meet its liabilities, there has been a material deterioration in
the ADI’s financial condition, the ADI is conducting its affairs in an improper
or financially unsound way, the failure to issue a direction would materially
prejudice the interests of the ADI’s depositors, and the ADI is conducting its
affairs in a way that may cause or promote instability of the Australian
financial system. This suggests that if APRA were to issue a direction
preventing the ADI from maintaining the cover pool, then the ADI is likely to
have been issued other directions about its affairs because of concerns about
its ongoing viability.
1.63
For the purposes of calculating the value of the
assets in the cover pool, a maximum limit is placed on the value of loans secured
by residential and commercial property. In particular, if the sum of the outstanding
principal amount of the loan secured by a residential property and the outstanding
principal amount of any equal or prior ranking loans is greater than 80 per
cent of the value of the residential property, then this loan is included in
the cover pool with a value of 80 per cent [Schedule 1, item 22, subsection 31A(3)].
For example, assuming the value of the outstanding principal amount of a loan
secured by a residential property is $85,000, and there is no prior ranking
loans and the value of the residential property is $100,000, then the value of
the loan for the purposes of subsection 31A(1) is $80,000. The value of the
property for this test is determined by reference to the most recent valuation
of the property. .
1.64
A similar test applies to loans secured by a
commercial property. The only difference is that the limit is set at 60 per
cent of the value of the commercial property. [Schedule 1, item 22, subsection 31A(4)]
1.65
The 80 per cent and 60 per cent limit for
residential and commercial property respectively is comparable to the limits
set in many other jurisdictions. The Bill contains a regulation making power
to change this limit. [Schedule 1, item 22, subsections 31A(3) and (4)]
1.66
This Bill specifies that the ADI must ensure that
the value of bank accepted bills and certificates of deposits in the cover pool
is no greater than 15 per cent of the value of all assets in the cover pool [Schedule
1, item 22, subsection 31A(2)]. This requirement
applies continuously through time. This ensures that the cover pool is mainly
comprised of loans made by the ADI. This requirement is also consistent with
the practice in Europe.
1.67
However, the 15 per cent limit on the value of bank
accepted bills and certificates of deposits does not apply in particular
circumstances. These circumstances include where compliance would be
inconsistent with the need to deal with an asset to satisfy a call on the security
in relation to a covered bond (such as winding up the cover pool). [Schedule
1, item 22, subsection 31A(6)]
1.68
This Bill does not specify a maximum level of over‑collateralisation.
This provides maximum flexibility for ADIs to determine the level of over‑collateralisation
based on their particular commercial considerations. However, as mentioned
above, any contractual over‑collateralisation, which would include the
legislative minimum over‑collateralisation of 3 per cent, counts towards the
8 per cent cap on the issuance of covered bonds.
APRA’s powers
in respect of the cover pool
1.69
As mentioned above, subsections 11CA(1) and (1AA)
of the Banking Act 1959 sets out
the circumstances where APRA may issue a direction to an ADI. In addition, subsection
11CA(2) of the Banking Act 1959
specifies the kind of directions APRA may give in respect of an ADI, an
authorised non‑operation holding company and any of their subsidiaries. This
means that APRA may have the power to issue directions in respect of assets in
the cover pool held by a covered bond special purpose vehicle (which could be a
subsidiary of an ADI).
1.70
However, this Bill specifies that APRA must not
direct, or give a direction, that would cause the covered bond special purpose
vehicle to make a payment or not make a payment, or to deal or not deal in an
asset which secures covered bond liabilities of the ADI. [Schedule
1, item 9, subsection 11CA(2AA)]
1.71
As mentioned above, the covered bond special
purpose vehicle may have liabilities to the ADI (other than liabilities relating
to derivatives or the provision of services) secured by assets which rank ahead
of the covered bond special purpose vehicle’s other liabilities. An example of
these assets could be voluntary over‑collateralisation. Also, as mentioned
above, the covered bond special purpose vehicle may hold assets on trust for
the ADI (known as trust back assets). Consequently, assets relating to voluntary
over‑collateralisation and trust back assets could be returned to the ADI for
the benefit of the ADIs depositors and other non‑secured creditors. However,
APRA’s direction making powers set out in Division 1BA of the Banking Act 1959 may not apply to the
covered bond special purpose vehicle.
1.72
Accordingly, this Bill specifies that APRA may
direct a covered bond special purpose vehicle to return assets to the issuing ADI
to the extent that such assets are not securing covered bond liabilities (that
is, assets relating to voluntary over‑collateralisation and trust back assets) [Schedule
1, item 22, subsection 31F(1)]. The circumstances
where such a direction can be made is limited to the circumstances set out in
subsection 11CA(1) of the Banking Act 1959.
[Schedule
1, item 22, subsection 31F(2)]
1.73
APRA is required to provide any direction as a
written notice to the ADI. This Bill indicates that this notice is not a
legislative instrument [Schedule 1, item 22, subsection 31F(3)].
Subsection 31F(3) is included to clarify that this notice is not a legislative
instrument within the meaning of section 5 of the Legislative Instruments Act 2003. This approach is
consistent with the approach used elsewhere in the Banking Act 1959 (for example, see section 13BA(3) and
section 13E of the Banking Act 1959).
1.74
The penalty if the covered bond special purpose
vehicle does not comply with any direction issued by APRA is the same penalty
that would apply to an ADI not complying with a direction as set out in section
11CG of the Banking Act 1959. [Schedule
1, item 22, subsection 31F(11)].
1.75
This Bill includes a number of provisions dealing with
administrative matters in respect of APRA’s directions‑making powers relating
to covered bonds. These provisions are the same as those provisions in section
11CA of the Banking Act 1959
which also deals with APRA’s directions‑making powers. These provisions
include the following:
• The
direction may deal with the time by which, or period during which, it is to be
complied with [Schedule 1, item 22, subsection 31F(4)].
• The
ADI is required to comply with the direction despite anything in its
constitution or any contract or arrangement to which it is a party [Schedule
1, item 22, subsection 31F(5)].
• APRA
may, by notice in writing to the ADI, vary the direction if, at the time of the
variation, it considers that the variation is necessary and appropriate [Schedule
1, item 22, subsection 31F(6)].
• The
direction has effect until APRA revokes it by notice in writing to the ADI. APRA
may revoke the direction if, at the time of revocation, it considers that the
direction is no longer necessary or appropriate [Schedule 1, item 22, subsection 31F(7)].
• APRA’s
decision to issue a direction in respect of covered bonds is subject to review
by the Administrative Appeals Tribunal as set out in Part VI of the Banking Act 1959 [Schedule
1, item 22, subsection 31F(8)].
• Information
relating to directions and revocations of directions under this section is
subject to the secrecy requirements in Part 6 of the Australian Prudential Regulation Authority Act 1998, unless
the information has been published in the Gazette under section 11CE of the Banking Act 1959 [Schedule
1, item 22, subsection 31F(9)].
• The
power for APRA to provide a direction in respect of covered bonds does not
limit any other powers of APRA to give directions [Schedule 1, item 22, subsection 31F(10)].
.
• If
a direction is given under subsection 31F(1), the Banking Act 1959 applies in relation to this direction as if
the covered bond special purpose vehicle were an ADI, and the direction were
given under section 29 of the Banking Act
1959 [Schedule 1, item 22, subsection 31F(11)].
This ensures that the general provisions relating to APRA issuing directions also
apply to any direction issued under subsection 31F(1). An example is that APRA
may publish in the Gazette notice
of any direction provided to the covered bond special purpose vehicle under
subsection 11CE(1) of the Banking Act 1959.
Winding‑up
the cover pool
1.76
A key principle is that a resolution process
relating to a failing ADI, and the resolution process relating to the covered
bond special purpose vehicle, should be separate from each other. This is
given effect by specifying that an ADI statutory manager or an external administrator
has no powers (apart from contractual powers) in relation to assets held by the
covered bond special purpose vehicle to the extent that those assets secure
cover bond liabilities. [Schedule 1, item 22, section 31C]
1.77
One implication of this limitation is that in the
event an ADI statutory manager or an external administrator is appointed to an
ADI that has issued covered bonds, the covered bondholders or their
representative may wish to appoint an administrator to the covered bond special
purpose vehicle. This may lead, in the event of the ADI not making payments
due to covered bondholders, to the wind‑up of the covered bond special purpose
vehicle with covered bondholders seeking repayment through sale of assets held
in the cover pool.
1.78
Alternatively, upon the appointment of an ADI statutory
manager or external administrator to the ADI, and cessation of payments by the
ADI of amounts due on the covered bondholders, covered bondholders may choose
not to wind‑up the covered bond special purpose vehicle. Instead, covered
bondholders may elect, as an alternative to the immediate sale of assets held
in the cover pool, to receive the interest and principal payments relating to
the covered bonds sourced from the covered bond special purpose vehicle. Under
this scenario, the cover pool of assets provides the source of funds for such
payments to covered bondholders.
Depositor
preference provisions and assets test
1.79
The current preference provisions set out in
subsection 13A(3) in the Banking Act 1959
currently impede ADIs issuing secured debt, such as covered bonds. This
follows since this subsection requires that liabilities in respect of protected
account holders in Australia (which include most depositors in Australia) rank ahead
of secured and other unsecured creditors in the distribution of a failed ADI’s
assets in Australia.
1.80
This Bill specifies that the assets of the ADI for
the purposes of subsection 13A(3) of the Banking
Act 1959 do not include any interest in an asset (or part of an
asset) in a cover pool of the issuing ADI [Schedule 1, item 18, subsection 13A(3A)].
This is because such assets are first available to meet the claims of covered
bondholders and, consequently, are not available to meet the claims of
creditors listed in subsection 13A(3) in the event an ADI is unable to meet its
obligations or suspends payment. However, as mentioned above, most depositors
will continue to be protected by the FCS. The FCS ensures (currently and once
the cap is changed) that 99 per cent of Australian deposit accounts are
protected in full. This amendment has no implications for the treatment of securitisation
transactions such as RMBS, or any implications for any other security arrangements
which an ADI may grant.
1.81
It is noted that the loans provided by the ADI to
the covered bond special purpose vehicle to fund the acquisition of assets from
the ADI would constitute assets in Australia for purposes of section 13A(3). The
value of such assets would represent the amount repayable to the ADI in the
event the covered bond special purpose vehicle is wound‑up.
1.82
If the ADI is unable to meet its contractual terms
relating to the issue of the covered bonds such as being unable to meet
interest and principal payments to the covered bondholders, then covered
bondholders would make a claim on the cover pool of assets held by the covered
bond special purpose vehicle. If this occurs, and in the event the cover pool
of assets is insufficient to meet the claims of covered bondholders and service
providers, any residual claim of covered bondholders and service providers on
the ADI would rank below most depositors and claims by government (see paragraph
13A(3)(f) of the Banking Act 1959).
This outcome arises without making any amendments to subsection 13A(3) of the Banking Act 1959.
1.83
Subsection 13A(4) of the Banking Act 1959 requires the ADI to hold assets in
Australia with a value equal to or greater than the amount of its deposit
liabilities in Australia. To ensure that issuing covered bonds has no impact
on this requirement, this Bill specifies that for the purposes of subsection
13A(4):
• the
ADI’s deposit liabilities are taken not to include an amount equal to the total
face values of covered bonds issued by an ADI; and
• the
assets of the ADI do not include:
– any
interest in assets (or part of an asset) in the cover pool of an issuing ADI;
or
– any
loan from the ADI to a covered bond special purpose vehicle that relates to
assets (or part of an asset) in a cover pool of the issuing ADI.
[Schedule 1, item 19,
subsection 13A(4A)]
1.84
The amendment indicating that the ADI’s deposit
liabilities are taken not to include an amount equal to the total face values
of covered bonds issued by an ADI is included for clarity reasons given the
term ‘deposit liabilities’ is not a defined term in the Banking Act 1959.
1.85
The amendment excluding an interest in assets (or
part of an asset) in a cover pool of issuing ADI makes it clear that no
interest in such assets can be included in an ADIs assets in Australia as they
are not available to meet deposit liabilities in Australia. Any loan (or part
of a loan) from the ADI to a covered bond special purpose vehicle funding a covered
bond special purpose vehicle’s holdings of such assets is similarly excluded from
the ADIs assets in Australia as such loans again do not represent assets which
would necessarily be available to meet deposit liabilities in Australia.
1.86
Similar to the new subsection 13A(3A), the new
subsection 13A(4A) has no implications for the treatment of securitisation
transactions such as RMBS, or any implications for any other security
arrangements which an ADI may grant.
Protection of
certain contractual rights
1.87
Subsection 11CD(1A) of the Banking Act 1959 indicates that in the
event APRA issues a direction, this does not allow the contract, or a party to
a contract (other than the ADI or a subsidiary) to deny obligations under the
contract, accelerate any debt under a contract or close out any transaction
relating to the contract. This is to enable APRA to implement corrective
measures aimed at securing the continued prudent operation of an ADI without
triggering a potential demand for repayment of all its debts.
1.88
Further, section 15C indicates that in the event an
ADI statutory manager is in control of an ADI, this does allow the contract, or
a party to the contract, to deny obligations under the contract, accelerate any
debt under a contract or close out any transaction relating to the contract. This
enables the statutory manager to determine whether an affected ADI could be
reconstructed without winding up an ADI.
1.89
In essence, these two subsections seek to prevent
the acceleration of claims on an ADI because of the issuance of a direction or
appointment of a statutory manager when such actions need not necessarily
prevent or impede any obligations being met as they fall due. However, they could
prevent covered bondholders accelerating their claim against the covered bond
special purpose vehicle in circumstances where APRA has issued an ADI a
direction not to make payments to covered bondholders, or where an ADI
statutory manager prevents the ADI making payments to covered bondholders.
1.90
Consequently, this Bill specifies that subsection
11CD(1A) of the Banking Act 1959 does
not apply if the ADI has failed to make payments to the holders or
representatives that it would have been required to make if a the direction
under subdivision A or B of Division 1BA or section 27 had not been given [Schedule
1, item 22, subsection 31B(1)]. In these
circumstances, covered bondholders or their representatives could invoke
acceleration against assets in the cover pool.
1.91
Similarly, this Bill specifies that subsection 15C(2)
does not apply if the ADI has failed to make payments to the holders or
representatives that it would have been required to make if the ADI statutory
manager was not in control of the business of the ADI [Schedule
1, item 22, subsection 31B(2)]. That is, the
appointment of a statutory manager by itself does not permit a covered
bondholder to accelerate debt and claim security but will permit this to occur
should the statutory manager prevent the ADI meeting its payment obligations to
the covered bondholders. In these circumstances, the covered bondholders could
also invoke acceleration against assets in the cover pool including the
exercise of their security interest in those assets.
Prudential
standards relating to covered bonds
1.92
Under Division 1A of the Banking Act 1959, APRA may issue prudential standards (as
defined in section 11AF of the Banking Act
1959) relating to an ADI issuing covered bonds. This Bill specifies
that APRA may provide prudential standards on any matters relating to covered
bonds including:
•
the issuing of covered bonds;
•
assets in cover pools; and
•
maintenance of cover pools.
[Schedule 1, item 22, subsection
31E(1)]
1.93
A prudential standard relating to these matters may
require the ADI and the covered bond special purpose vehicle or vehicles to collectively
satisfy particular prudential requirements. [Schedule 1, item 22, paragraph 31E(2)(a)]
1.94
The powers set out in the Banking Act 1959 in relation to existing
prudential standards would apply in relation to prudential standards dealing
with covered bonds as set out in subsection 31E(1). This result arises because
subsection 31E(1) refers to the term ‘prudential standard’ which is defined in
subsection 5(1) of the Banking Act 1959.
The definition indicates that a prudential standard means a standard under
section 11AF of the Banking Act 1959.
Consequently, all of the requirements relating to prudential standards set out
in section 11AF would apply to a prudential standard relating to matters set
out in subsection 31E(1).
1.95
As mentioned above, this Bill does not apply to
either foreign ADIs issuing covered bonds, or an ADI issuing covered bonds
secured entirely by foreign assets. This Bill does not restrict APRA’s
authority to make prudential standards in relation to such ADIs.
1.96
This Bill also provides direction to APRA in
setting prudential standards in respect of the assets and liabilities
associated with issuing covered bonds. In particular, for the purposes of
applying the prudential standards, the assets in the cover pool are to be treated
as the ADI’s assets, provided that the value of the cover pool (or pools) does
not exceed 8 per cent of the ADI’s assets in Australia [Schedule
1, item 22, subsection 31D(1) and (2)]. This 8
per cent benchmark, which can be amended by regulation, is the cap on the
issuance of covered bonds. The 8 per cent benchmark for prudential standards
purposes applies continuously through time rather than at a particular point in
time. Consequently, any additional assets which an ADI may be required to sell
to the covered bond special vehicle special and allocate to the cover pool
after the initial issuance of covered bonds are captured.
1.97
In addition, for the purposes of prudential
standards, any liability of the ADI to the special purpose vehicle that relates
to an asset, or part of an asset, which is treated as an asset of the ADI is
disregarded [Schedule 1, item 22, subsection 31D(3)].
An example of such a liability could be a derivative
between the ADI and the covered bond special purpose vehicle.
1.98
Similarly, for the purposes of prudential
standards, any liability of the covered bond special purpose vehicle to an ADI
that relates to an asset, or part of an asset, which is treated as an asset of
the ADI is disregarded [Schedule 1, item 22, subsection 31D(4)].
An example of such a liability is the loan provided by the ADI to the covered
bond special purpose vehicle to fund the acquisition of assets in the cover
pool from the ADI. Such a loan can be apportioned between that component which
relates to assets treated as assets of the ADI for prudential purposes and that
component which relates to assets not treated as assets of the ADI for
prudential purposes.
1.99
APRA retains the right to impose a different treatment
in prudential standards in respect of any assets in the cover pools in excess
of 8 per cent of the ADIs assets in Australia [Schedule 1, item 22, paragraph 31E(2)(b)].
This may include treating amounts of assets in the cover pool over the 8 per
cent limit in a similar way as over‑collateralisation in a securitisation
transaction which may be required to be deducted from the ADI’s capital.
1.100
Further, APRA retains the right to impose
prudential standards in respect of any liability of the ADI to a covered bond
special purpose vehicle that relates to an asset, or a part of an asset, that
is not treated as an asset of the ADI, that are different from disregarding the
liability as specified in subsection 31D(3) [Schedule 1, item 22, paragraph 31E(2)(c)].
Similarly, APRA also retains the right to impose
prudential standards in respect of any liability of a covered bond special
purpose vehicle to the ADI that relates to an asset, or a part of an asset,
that is not treated as an asset of the ADI, and to impose in prudential
standards requirements that are different from disregarding the liability as
specified in subsection 31D(4) [Schedule 1, item 22, paragraph 31E(2)(d)]. For
example, APRA may require such a liability to be recognised as a subordinated
loan in the accounts of the ADI and subject to a penal capital treatment.
Application
and transitional provisions
1.101
The commencement date is the date of Royal Assent
of this Bill [Item 2, commencement]. There
are no transitional provisions.