Overall Features of Cover Bonds and Their Role in Bank Funding and Use by Australian Banks

"The Wall Street Journal" found that the current bond yields were 0.20. These bonds are issued by the US government. In view of the fact that Fannie Mae Securities is a mortgage-backed securities issued by FNMA. We have observed that Fannie Mae and Treasury yields are somewhat different because FNMA Personal Securities and Treasury bonds are issued by the US government. Therefore, we note that there should be some difference between the two rates. As a result, Fannie Mae gets money from investors and financial institutions and sells their mortgages.

“Individuals and businesses lend their savings to borrowers. In exchange, borrowers give lenders a debt instrument, which is called bonds, representing a promise by borrowers to pay interest income to lenders on the principal (the amount of money borrowed) until the principal is repaid to the lenders” (Feldstein & Fabozzi, 2011).

Many Eurozone banks hold “periphery” bonds and many analysts are concerned that they do not have sufficient capital to absorb losses on their holdings of sovereign bonds should one or more Eurozone governments default or restructure their debt. The crisis has also triggered capital flight from banks in some Eurozone countries, and some banks are reportedly finding it difficult to borrow in private capital markets, causing some investors to fear a banking crisis in Europe that could have global repercussions.”

4. Bonds that are not recorded in the name of the bondholder are called unsecured bonds.

Prior to the crisis, the market comprised mainly bonds issued by the Australian banks and asset‑backed securities. Together these accounted for just over half of the outstanding stock of Australian bonds in June 2007. Bonds issued by the public sector were a relatively small share of the market, at 16 per cent of the total outstanding

Corporate bonds are one of the main products of the fixed income market. These instruments have similar features that of a bank loan, except that they can be transferrable from one lender (investor) to another, and can be traded in market which is known as corporate bond market. Trading is performed either on price or yield basis. Bond usually trades either at premium or at discount to its face value. The quality of the bond is derived from creditworthiness of the company or default risk. Based on potential default risk, bonds are evaluated on credit rating

Today, the municipal bond market holds nearly $3.7 trillion in principal outstanding from over one million unique issues. This debt primarily finances public projects for the 46,000 local and state government issuers participating in the market. Unfortunately, exemptions for disclosure requirements as well as an ineffective regulatory structure cultivated a municipal bond market that, unlike the corporate equity market, remains opaque.

Australia has possessed an extremely successful financial market system courtesy to the Government implementation of influential regulatory bodies. These regulatory bodies such as the Reserve Bank of Australia (RBA), Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulation Authority (APRA), play a highly significant role in the operation of the Australian economy. Their responsibilities are to regulate Australia’s financial markets, to make the Australian economy fair to promote economic activity. The Australian economy has adopted an effective economic structure that is administered by these three major independent regulatory bodies in conjunction with Federal Government Treasury and other

The company can also issue bonds in offshore markets to raise funds including the EMTN, US PP, US 144A and US Public market. Recent Australian companies to issue in these markets include Ausnet (€560m Euro market), Fortescue (US$2.5bn senior secured issue US PP), BNZ (Benchmark, 144A programme). The US Public and 144A markets are not suitable options for the company as both have significant legal costs and minimum issues sizes of US$500mio. The most viable offshore options are the EMTN and US PP market.

Many banks were taking on huge risks increasing their exposure to problems. Perhaps it was ironic, as Evan Davies observed, that a financial instrument to reduce risk and help lend more—securities—would backfire so much.

Furthermore, the pickup in sovereign bonds demand by domestic banks when foreign investor demand decreases does act as a stabilizing pillar for sovereigns. Overall reliance on domestic banks for funding might be characterized as a low run risk, however, it could turn into a high one if there is an accompanying increase in bank-sovereign nexus that could transfer into higher funding costs for sovereigns and larger refinancing risk. This is exactly what was observed in the GIIPS countries of Europe during the sovereign debt crisis. Sovereigns should therefore assess the motivations of such domestic banks for increasing their holdings of their own sovereign bonds in order to assess the risk of those banks as an investor base.

Date: May 2011 Disclaimer This publication has been prepared as a general overview of the Banking Industry in Australia and does not constitute and is not intended to constitute financial product advice as defined under the Corporations Act 2001 (Cwth). Nothing in this document should be construed as a recommendation or statement of opinion intended to influence a person in making an investment decision. The information is made available on the strict understanding that the Australian Trade Commission (Austrade) is not providing professional advice. While all care has been taken in the preparation of this publication, Austrade expressly denies liability for any loss or damage of any nature (including but

By securitising assets and removing them from their balance sheet, banks can use the cash proceeds for a number of reasons such as to reduce deposit levels, retire a debt, and buy back share capital (Wolfe, 2000). Twinn (1994 in Wolfe, 2000) shows that as capital requirements of bank increases, so does the absolute quantity of assets securitized. Banks willing to expand their loan provision business without increasing their capital or liabilities resort to securitization. Corporate issuers securitize to efficiently access capital markets in lieu of intermediated debt finance at a cost of capital, which would not be possible on issuer’s own credit rating more efficiently (Jobst, 2006).

the pool; an investor in a covered bond had recourse to the issuer, as well as a claim that was secured

Collateralised Debt Obligations, short for CDOs, is an important part of asset securitisation. CDOs provided more liquidity in the economy which was a popular financial innovation. It is an innovative financial product that repackages different debts into a new portfolio. In CDOs, investment bank gathered a series of assets from the fixed-income market, such as mortgage-backed securities, credit-default swaps, and high-yield bonds. Once the CDO has created by the investment bank, it would distribute the cash flows from those mentioned assets to investors in the CDO. CDOs pool all the cash flows from its collection of assets together and divided into rated tranches or slices, in order to satisfy the needs of different risk preferences of investors. Suppose there are three basic tranches, safe, good enough and risky. When money comes in, the top one will be filled in first. It