Treasurer Proposes New Rules to Increase Funding for Mid-Tier Banks

Under the new regulations, authorised deposit-taking institutions (ADIs) would be allowed to allocate up to 12% of their Australian assets into the cover pools backing these bonds. The previous 8% cap had been in place since covered bonds were first permitted in Australia in 2011.

Mortgage brokers settled a record 81.6% of new home loans in the June quarter. They are interested in whether these new funding opportunities will translate into more competitive pricing from banks, especially amidst pressure from the big four.

Covered bonds are secured wholesale debt instruments that provide investors with claims not only on the issuing bank but also on a designated pool of assets, typically home loans. This dual protection generally gives covered bonds a higher credit rating, often better than that of the bank itself, which makes them less expensive than unsecured debt and allows for longer-term sales.

Currently, medium-sized banks hold ratings between A- and A+, while the big banks are rated at AA- according to the Council of Financial Regulators (CFR). The CFR's final report regarding small and medium-sized banks, submitted to the government in August 2025, indicated that covered bonds enable lower-rated banks to issue higher-rated debt, helping to mitigate the funding disparity with larger banks.

Previously, the 8% limit was intended to safeguard depositors, as assets in the cover pool are protected in the event of bank failure. The CFR acknowledged that transitioning to a 12% cap aims to strike a balance between increasing competitive advantages and mitigating associated risks.

Medium banks obtain more than 80% of their new mortgages through brokers, which is significantly higher compared to major banks. Although non-major lenders have positioned themselves as more broker-friendly, major banks still captured 43.9% of broker-originated home loans in 2025, as reported by the Mortgage & Finance Association of Australia (MFAA).

Industry advocates have been pushing for the cap increase. In its submission during the CFR review, Bendigo Bank requested the rise from 8% to 12% and asked for covered bonds to be considered high-quality liquid assets. The Australian Banking Association supported this initiative, with Chief Executive Simon Birmingham stating that a larger cap would enhance competitive pricing opportunities for smaller lenders.

This covered bond adjustment is part of a broader legislative reform agenda as outlined in the 2026–27 Budget, which aims to reduce compliance costs in the financial sector by $780 million annually once fully enacted. Additional consultations on the Banking Regulations 2026 also include proposals for eased Financial Accountability Regime requirements for smaller banks and an increase in the withdrawal limit for deceased estates from $15,000 to $30,000.

Despite the potential benefits, it may take time for these changes to impact borrowers directly. According to the CFR’s 2024 issues paper, only eight Australian banks currently issue covered bonds, and a significant portion of their limits remains untapped. Any cost savings achieved will ultimately need to be passed on to consumers.

Attention will also be directed towards the Australian Prudential Regulation Authority (APRA), as the CFR indicated that approval of the new cap could affect the classification of covered bonds as high-quality liquid assets, further influencing funding conditions. Additionally, proposed reforms in the Budget would relieve authorized credit representatives from the requirement to maintain individual Australian Financial Complaints Authority (AFCA) membership, streamlining compliance for over 40,000 representatives.

As households continue to adjust to four interest rate increases this year, the cash rate now stands at 4.6%. The next decision from the Reserve Bank is anticipated on November 3. Chalmers also noted that upcoming revisions to Treasury forecasts might reflect slower growth and an uptick in unemployment due to rising rates and inflation.