Treasury Would Lift the Covered Bond Cap to 12% and Submissions Close Friday. The CFR’s Own Paper Says Banks Keep Headroom Under the 8%

What actually landed, and when

On 22 October 2026, Treasury opened a consultation on draft Banking Regulations 2026. The headline measure: the covered bond issuance limit for authorised deposit-taking institutions would rise to 12 per cent of an ADI’s assets, up from 8 per cent.

The consultation runs for nine days and closes on 30 October 2026. Treasury’s consultation page describes the change as following a recommendation from the Council of Financial Regulators’ Review into Small and Medium-sized Banks. The draft also remakes the Banking Regulations 2016, which are due to sunset on 1 April 2027, and makes what Treasury calls small technical edits to remove outdated references. Beyond the covered bond figure, the draft is largely unchanged from the 2016 regulations.

The 8 per cent figure is not new and not obscure. It dates to 2011, when Australia legalised covered bonds, and it is embedded in the Banking Act 1959 — section 28 of that Act is headed “Restrictions on issuing covered bonds—8% rule”. If you want the precise legal mechanism by which a regulation sets the operative percentage, read the draft regulations and the explanatory statement on Treasury’s consultation page rather than taking a summary’s word for it, including this one.

What a covered bond is, in the terms that matter

Most brokers never need to think about bank funding instruments. This one is worth understanding because the collateral is your product.

A covered bond is secured wholesale funding. The issuing bank commits a dedicated pool of assets — in Australia, residential mortgages — to a cover pool held by a special purpose vehicle and checked by a registered auditor. Bondholders get dual recourse: a claim on the bank itself, plus a claim on the pool that ranks ahead of unsecured creditors. Australian law requires the pool to be worth at least 103 per cent of the face value of the bonds, so more assets must be committed than money raised.

The Reserve Bank’s September 2017 Bulletin article on covered bonds in Australia sets out the structure and the trade-off. Because bondholders are secured, the paper has historically priced tighter than comparable unsecured bank debt — the RBA put the secondary-market gap at around 20 basis points at that time. But the RBA also noted the overall saving can be smaller than that gap suggests, because unsecured investors may demand a higher return once they rank behind a larger ring-fenced pool.

That is also why there is a cap at all. The RBA’s analysis explains that depositors retain priority over covered bondholders’ residual claims, and that the cap limits how much of a bank’s asset base can be set aside away from depositors. Lifting the ceiling is a deliberate policy trade-off between competition and the size of the buffer sitting in front of depositors — not a cost-free administrative tidy-up.

The competition case — in the proponents’ own words

Treasury’s 23 October release frames the measure as supporting access to stable, cost-effective funding, and says the Council of Financial Regulators found a higher cap would especially benefit mid-sized banks’ access to longer-term, lower-cost funding. Treasury also points to reduced rollover risk, greater funding flexibility and better access to offshore investor markets.

The Australian Banking Association put out its own release the same day.

Birmingham added that “rules should reflect the size and risk of each bank”, and that the task now “is about finalising the increase in the covered bond cap from 8 to 12 per cent quickly so banks can put it to work”. The ABA used the same release to restate its broader asks: a 25 per cent reduction in regulatory costs across all levels of government by 2030, and greater regulator coordination through the Regulatory Initiatives Grid.

Among individual lenders, Rod Finch — appointed Chief Executive Officer and Managing Director of BOQ Group from 1 March 2026 — described the reform as “a step towards levelling the playing field for smaller banks”, in remarks reported by The Adviser on 27 October. The Adviser also reported Treasurer Jim Chalmers telling the Citi A50 Australian Economic Forum that “our sensible proposals will reduce unnecessary costs in the financial sector without compromising on standards”. Both quotes appeared in that outlet’s reporting rather than in the primary releases, which is worth knowing when you repeat them.

The part that complicates the pricing story

Here is the awkward bit, and it comes from the regulators rather than from critics.

The Council of Financial Regulators ran this review with the ACCC. Its December 2024 issues paper — the public consultation document that preceded the final report to government — made three observations that sit uneasily beside “more room to price competitively”.

First, on the cap itself, the paper confirms the constraint in plain terms: “Banks cannot encumber more than 8% of their total Australian assets in covered bonds.” Second, on who uses the instrument: “Only major banks and some medium banks have issued covered bonds.” Third, and most significantly, on funding costs: the paper stated that “there has been little difference in the implied funding costs for the major banks and small to medium banks”.

The paper attributed the higher cost of newer wholesale funding for smaller banks primarily to their lower credit ratings. A higher covered bond cap does not change a credit rating.

That is not an argument against the reform. Option value in a funding crisis is genuinely worth something, and so is the rollover-risk benefit Treasury identifies. It is an argument against expecting the 50 per cent increase in the ceiling to arrive as a 50 per cent increase in anything you can see on a rate sheet.

So what changes on your panel

Not pricing, this quarter. What changes is the strategic value of a particular kind of book — and that is where this becomes a broker story rather than a bond-market one.

Covered bonds in Australia are backed by residential mortgages. Every Australian covered bond issued to the date of the RBA’s 2017 review was. The pool must be overcollateralised to at least 103 per cent, it is audited, and the assets in it must meet eligibility criteria set out in the Banking Act and APRA’s Prudential Standard APS 121 Covered Bonds. We have not reproduced those criteria here, and you should not assume their content from a summary — but their existence is the point. A cover pool is not “any loans”. It is loans that qualify.

So if the ceiling rises by half, the lenders positioned to use it are the ones that can originate a large volume of qualifying residential mortgages. For a mid-tier bank, the broker channel is overwhelmingly how that volume arrives. On BOQ’s FY26 results, as reported by The Adviser on 16 October, brokers originated 72 per cent of the bank’s FY26 lending and account for 58 per cent of its existing portfolio.

That same reporting carries the complication. BOQ chief financial officer Racheal Kellaway told the market the bank had “been effectively relying much more on brokers than we see going forward”, while adding that it expected the channel “to remain a very important channel for us”. So the lender in that example is simultaneously the most broker-reliant on its own numbers and the one signalling it intends to moderate that reliance. A funding reform that makes clean resi volume more valuable does not automatically mean a mid-tier wants more of it through your channel — it may mean the same volume sourced differently. Both things can be true at once, and brokers should hold them together rather than pick the flattering one.

The practical implication is a question, not a prediction. Over the next twelve to eighteen months, if a non-major on your panel starts competing harder for a specific slice — clean, well-documented, standard-security residential files — while staying flat or tightening on the harder end of its book, funding structure is one plausible explanation. That is a conversation to have with your BDM with specifics in front of you, not a theory to apply to a client.

What this does not change: your BID obligations

Nothing in a funding regulation touches the best interests duty. It is worth saying plainly because a known-future-change creates a specific temptation.

Your obligation to act in the client’s best interests is assessed on the information and options available at the time you make the recommendation. ASIC’s Regulatory Guide 273 is the guidance brokers and licensees work to on that duty. A prospective improvement in a lender’s funding costs is not a present-day product feature, and “wait — the mid-tiers may sharpen up next year” is not a recommendation you can evidence on a file today.

If a client is better off refinancing or proceeding now, the fact that a draft regulation might improve somebody’s wholesale funding in 2027 does not change that analysis. Equally, if you do have a genuine, client-specific reason to time a transaction, the reason has to be the client’s circumstances and the options actually available, recorded on the file in the usual way.

This is general information only. How these obligations apply to your files is a question for your licensee or aggregator’s compliance team, and the provisions themselves sit in the National Consumer Credit Protection Act 2009 and ASIC’s guidance — read them, or have your compliance adviser read them, rather than relying on a summary.

The rest of the package

The covered bond measure arrived inside a wider deregulation announcement on 23 October that Treasury says cuts red tape across financial services by $780 million a year. Three other items are in it:

• Financial Accountability Regime reporting. FAR reporting requirements for smaller banks would be aligned with prudential regulation thresholds. Treasury describes this as streamlining reporting without affecting regulatory oversight. The ABA’s release welcomed streamlined reporting for smaller banks.
• Deceased estates. The withdrawal limit for estate-related expenses, including funeral expenses, would rise from $15,000 to $30,000, with express provision for paying court filing fees from an account. Not a broking measure, but one that turns up in deceased-estate conversations with clients.
• Sunsetting regulations. The banking regulations that would otherwise lapse on 1 April 2027 are remade so they stay in force. This is the housekeeping the covered bond change is travelling inside, which is partly why the consultation window is short.

A second, separate consultation on implementing parts of the better regulation measures is also open. Both are listed on Treasury’s consultation hub.

What to review this week

Four things, none of which take long.

1. Decide whether your licensee wants to make a submission. Submissions on the Banking Regulations 2026 close 30 October 2026 and go through Treasury’s consultation website. If you have a view on how mid-tier funding capacity shapes broker-channel competition, your aggregator or industry association is the realistic route, and the window is days not weeks. Treasury lists the Banking and Credit Unit as the contact for questions.
2. Map your mid-tier exposure honestly. Pull your last six months of lodgements by lender and work out what share sits with mid-tier banks and mutuals rather than majors and non-banks. That number tells you how much this reform could eventually matter to your business. If it is small, this is a watch item, not a planning item.
3. Separate your pipeline into “clean” and “complex”. Not as a marketing exercise — as a funding-sensitivity exercise. The clean, standard-security, fully-verified residential files are the ones a covered-bond-funded lender can most readily use. The rest will keep depending on balance-sheet appetite, securitisation and specialist funders. Knowing your split tells you which lender relationships to invest in.
4. Put one question to your mid-tier BDMs. Not “will rates come down”. Ask whether their lender currently issues covered bonds, and whether funding structure influences where they compete hardest. Some will not know; the ones who do will tell you something useful about where their pricing is going to live.

What to watch next

Three markers. Whether the 12 per cent figure survives consultation unchanged, and what commencement date the final regulations carry — Treasury has signalled implementation “from later this year”, with the current regulations sunsetting on 1 April 2027. Whether any mid-tier issuer publicly links new covered bond issuance to the higher ceiling once it is settled, which is the first real evidence the capacity is being used rather than banked. And whether APRA says anything about cover pool eligibility or depositor protection as the ceiling moves, since the prudential settings around APS 121 are where the practical limits on a bigger pool will actually bite.

For brokers, the honest summary is that this is a slow-moving structural change wearing a competition headline. The right response is not to reposition anything today. It is to know which part of your pipeline a mid-tier lender can fund cheaply, which part it cannot, and to keep the relationships that cover both.