New Financial Services research report from Business Monitor International is now available from Fast Market Research

Boston, MA -- (SBWire) -- 07/27/2012 --BMI View: The recent amendment to the Banking Act in October 2011 has allowed Australian banks to raise funding through the issuance of covered bonds. While covered bonds could help lower funding costs, we see that in Australia's case, the probable decline in house prices could erase this benefit. Moreover, given that these bonds effectively downgrade the priority of other claims, the new issuances covered bonds force up the cost of later issues of unsecured debt. With plenty of room for house prices to fall southward, we do not expect the performance of Australian banking equities to improve in the near term. While almost all Australian banks have now passed on to consumers the full rate cut of 25 basis points (bps) by the Reserve Bank of Australia (RBA) in December 2011, a number of banks have cited the increase in funding costs and compressing profits. In October 2011, in an effort to increase the options for banks to diversify their funding sources, the Australian senate approved the amendments to the Banking Act, known as 'Banking Amendment (Covered Bonds) Act 2011', allowing financial institutions to issue covered bonds. The Safest Form Of Mortgage-Backed Bonds? Covered bonds, while historically prevalent in Europe, were only introduced to the Australian, Canadian and US markets in 2011. Similar to a residential mortgage-backed security (RMBS) and collateralized debt obligations (CDOs), covered bonds are backed by a pool of collateral, ranging from residential mortgages, commercial mortgages and public sector debt. However, these debt instruments are structured as a plain-vanilla fixed income instrument, thus shielding the investor from any prepayment or default risk. The key advantage that covered bonds provide to investors is recourse not only to the cash flows from pool of collateral but also the bank's assets should there be any shortfall in income, ahead of all other creditors. This essentially downgrades the claims of all other parties, including depositors and other unsecured debt holders. In Australia, only a maximum of 8% of total assets can be used in the collateral pools for covered bonds. However, comparing this with other countries as in the table above, Australia has certainly taken a more aggressive stance on allowing banks to issue more against their balance sheets than other recent entrants into this market. Source: BMI, RBA Even after taking the needed over-collateralisation into account, many are expecting to institutions to raise up to AUD130bn worth of covered bonds, with the total size that the four major banks have put forward for their covered bond funding programmes totalling to AUD90.0bn. As of February 2012, AUD17.3bn had been raised, but increasingly, the new issuances are not reaping the benefits that the instrument should theoretically bring. Needed Benefits From Covered Bonds Since the Australian banks rely heavily on foreign markets for short-term funding, any external s

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