The Australian government has released draft rules to lift the covered bond issuance cap from 8% to 12%, giving mid-tier banks access to cheaper funding. Treasurer Jim Chalmers unveiled the draft regulations at the Citi A50 Australian Economic Forum on Friday.
The consultations on the Banking Regulations 2026 and on a second package of better regulation measures also cover lighter Financial Accountability Regime reporting for smaller banks. They would double the bank account withdrawal limit for deceased estate expenses from $15,000 to $30,000. The covered bond change is one of 14 legislative reforms in the 2026–27 Budget that the government says will cut financial sector compliance costs by $780 million a year once fully in place.
WHAT THE DRAFT RULES CHANGE
Assistant Treasurer and Minister for Financial Services Daniel Mulino announced the reforms, which are aimed at cutting $780 million a year in red tape. The government will also remake banking regulations that are due to expire on 1 April 2027, to ensure they remain fit for purpose.
WHY COVERED BONDS MATTER TO MID-TIER LENDERS
Investors in covered bonds have a claim on the issuing bank and, if it fails, on a ring-fenced pool of assets, usually home loans. Because of that double protection, the bonds usually carry a higher credit rating than the bank itself, which makes them cheaper than the bank's unsecured debt and lets it sell them for longer terms.
Medium banks are rated between A- and A+, compared with AA- for the major banks, according to the Council of Financial Regulators (CFR). Its final report on small and medium-sized banks, handed to government in August 2025, said covered bonds let lower-rated banks issue highly rated debt, which partly closes the funding gap with bigger rivals.
CAP HISTORY, SAFEGUARDS AND BROKER LENDING
The 8% ceiling has stood since Australian banks were first allowed to issue covered bonds in 2011, and was originally meant as a depositor safeguard. Assets in a cover pool sit ahead of other creditors, so the more a bank pledges, the less is left for others if it fails. The CFR said a 12% cap aimed to balance the competition gains against that risk.
Bendigo Bank asked in its submission to the CFR review for the cap to rise from 8% to 12% and for covered bonds to count as high-quality liquid assets. As of the CFR's 2024 issues paper, only eight Australian banks had issued covered bonds, using about a third of their limit on average. Medium banks source more than 80% of new mortgages through brokers, well above the majors, although the majors still took 43.9% of broker-originated home lending in 2025. Brokers settled a record 81.6% of new home loans in the June quarter.
TIMETABLE AND INDUSTRY RESPONSE
Chalmers said the plan to let banks issue more debt will improve competition and productivity in the sector as rising inflation and interest rates sour the economic outlook. The Australian Banking Association (ABA) has reaffirmed its call for all levels of government to commit to a 25% reduction in regulatory costs by 2030.
The reforms include increasing the cap on banks' covered bond issuance to improve access to stable and cost-effective funding, and aligning Financial Accountability Regime reporting requirements for smaller banks. Following consultation, the government intends to begin implementing the reforms later this year.