Australia’s banks could have faced ‘exorbitant’ funding costs if covered bonds were not an option, a Treasury official told a Senate committee on Wednesday, although one submission to its post-GFC enquiry repeated a call for Australia to set up a counterpart to Canada’s CMHC.

The Senate Economics References Committee was holding the first hearing of an inquiry into the effects of the global financial crisis (GFC) on the Australian banking sector. One of the terms of reference of the enquiry is the cost of funds for lending purposes facing Australian financial institutions.

In his opening statement to the committee, Jim Murphy, executive director, markets group at the Treasury, noted that the government had sought to boost the sustainability of the sector, especially of smaller lenders, by allowing ADIs to issue covered bonds.

He was later asked by committee chair Senator David Bushby about recent developments in wholesale funding costs, which he said appeared not to have come down to pre-crisis levels, as had been forecast in a 2010 inquiry.

Murphy said that funding costs over the whole period had risen by around 140bp on average, with this being partly the result of an increased assessment of risk. He then said that the country’s major banks and some smaller ones had made use of covered bonds.

“Possibly if they had not had covered bonds,” he added, “they would have found it difficult to find funding or would have paid an exorbitant price.”

In a submission to the enquiry in June, Commonwealth Bank of Australia said that the cost of funds on A$11bn of covered bonds it had issued averaged around 30bp-40bp less than if covered bonds were not available.

Covered bonds lower wholesale funding costs – Market pricing indications – 5 year benchmark

Source: CBA

Murphy’s comments echoed those of Australian deputy prime minister Wayne Swan, who said in June that it had been ‘critical’ to give Australia’s financial institutions the opportunity to tap issue covered bonds when the government introduced covered bond legislation last year. (See article here.)

However, the Mortgage & Finance Association of Australia (MFAA) argued in a submission to the inquiry that covered bonds and other government measures are not doing enough for the funding costs and access of smaller lenders and non-banks. It repeated a call that it made at the 2010 inquiry for the government to follow Canada’s example and establish an institution comparable to Canada Mortgage & Housing Corporation (CMHC).

The MFAA – which represents mortgage professionals, said that the objectives of this were:

• To create a more competitive market that would allow smaller financial institutions to provide housing finance at comparable rates to larger institutions;
• To provide investors with high quality Mortgage-Backed-Securities that are secured by a government guarantee and underlying mortgage-insured property;
• To lower mortgage rates to the consumer; and
• To strengthen the solvency of the financial system by adding another liquidity source for housing finance.

“Accordingly MFAA urges the Federal Government to consider the rationale and action of the Canadian Government when it established the National Housing Act Mortgage backed Securities and the Canadian Mortgage Bond,” said the association. “This should not be seen as a knee-jerk reaction to a temporary problem but rather a permanent system to ensure there are appropriate levels of competitive funding available to all lenders, irrespective of the economic environment.”

However, despite extolling the virtues of the Canadian system, the MFAA did not acknowledge in its submission that Canada is introducing covered bond legislation.

Documents related to the inquiry can be found here.