Australia Proposes Raising Banks' Covered Bond Cap to 12% of Assets

what happened

Australian Treasurer Jim Chalmers unveiled draft regulations on Friday that would raise the ceiling on covered bond issuance for lenders, according to Reuters. Deposit-taking institutions could issue such bonds up to 12% of their assets, compared with the current 8% cap.

Covered bonds are secured funding backed by both the issuer and a dedicated pool of assets, usually residential mortgages, the central bank explains. The government says a higher limit would let banks, especially smaller ones, borrow at potentially lower cost and secure longer-term funding.

Speaking at the Citi A50 Australian Economic Forum in Sydney, Chalmers pointed to rising focus on borrowing costs and surging bond yields, saying "massive investments in the AI boom are ramping up competition for capital". He also said the government is cutting A$780 million ($547.09 million) in annual financial services red tape. Consultation closes on October 30.

why it matters

For markets, the proposal is mainly a signal for Australian banks: cheaper funding could help margins at smaller lenders, while competition for capital from AI-related borrowing keeps pressure on yields. The final rules depend on feedback gathered during consultation.

market impact

Australian banks: cheaper covered bond funding could support margins, mainly for smaller lenders

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