The Identification And Evaluation Of Legal Risk In Australian Covered Bonds

Abstract

The aim of this thesis is to identify and evaluate the principal legal risks in Australian covered bonds of importance to investors. To achieve this goal, this analysis involves challenging certain established doctrines in relation to how ‘safe’ Australian covered bonds actually are as a financial instrument, following an examination of their legal underpinnings from a risk perspective. The overarching conclusion reached in this thesis is that Australian covered bonds contain certain legal risks that might shift common perceptions of them a. from being a strictly safe (or almost ‘risk-free’) financing tool — that is, one that represents a significantly safer deal for investors than other types of securities b. to being a ‘risky’ asset class — that is, containing real (even if, to date, largely unrealised) risks that may result in disputes and/or litigation, leading to financial loss for investors. This is based upon a hypothesis that while covered bonds have been conceived and developed within civil law frameworks, where there exists a strong tradition and acceptance of these securities and an efficient asset transfer and mortgage registration system, they do not fit seamlessly within common law frameworks — nor, in the case of Australia, does the statutory overlay in itself protect the product against legal risk. Since Australian covered bonds have been, and are likely to be, used by ADIs well into the foreseeable future, some attempt to understand their material legal risks seems warranted. Therefore, this analysis seeks to contribute to a deeper understanding of this new financing instrument in Australia.