The Australian Prudential Regulation Authority (APRA) has released its long awaited covered bonds standards but lawyers doubt the standards will be well received by issuers. 

In September last year changes were made to allow Australian banking institutions or authorised deposit-taking institutions (ADIs) to undertake covered bond schemes, and since then five covered bond programs have been issued. However, new standards from APRA released last week are not exactly what ADIs hoped for, following six months of consultation, according to legal advisors. "The release of APS 121 creates certainty, however, the market may not be delighted that APRA, on the key issues, has not accepted the market’s comments,” says Norton Rose partner Tessa Hoser. “APRA has more or less maintained its position as announced last year."

According to fellow Norton Rose partner Petar Kuessner APRA has given a degree of flexibility in how ADIs interpret the rules, but there will be consequences for those that do not follow the program implicitly. “If ADIs do not adopt APRA's implicitly preferred Covered Bond Program structure on a number of important issues, then ADIs will bear a higher capital charge through the risk weighting assigned to particular assets,” he said.

According to the partners, there will be a number of additional administrative burdens that ADIs will need to deal with going forward, to ensure that they obtain the maximum concessional risk-weighting for the assets that are inside and outside the cover pool securing the covered bonds. “For ADIs considering establishing their own Covered Bond Program, this gives them more certainty as to the administrative and structural issues they will need to deal with in order to set up a program,” said Kuessner. “It is not that covered bonds will be less attractive, but there may be a tinge of disappointment that more of the industry submissions were not built into the final framework.”

Although APRA has capped the amount of covered bonds for Australia ADIs at eight percent of total assets analysts estimate that the Australian banks still have capacity to issue between A$16 billion and $A28 billion of covered bonds each, if they chose to under these new standards.

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