"If banks keep lending out $90 for every $100 deposited then it's only a matter of time when they will become the legalised Bernard Madoff's of the globe. Correction; many banks already have!"
Our banks uses fractional reserve system, hence it can lend 100$ for every 8$ in deposit for eg. aussie banks are a high everage bet on housing as big four have more than 60% of thier loan book in housing loans.
With recent rattles in bond market(long term), wholesale source of funding will become even more costly, hence b4b(big four banks) desparation to find other/any source of funding which is cheaper, Gov has once again become thier saviour, by allowing covered bonds and by making deposit garantee permanent. I wonder if this announcement is mere coincidental with recent rattles in bond market?
One needs to ask if covered bonds are so great why our banking regulators were so oppsosed to it till now?
If some one defaults on thier mortgage, covered bond buyers can recover it from depositors money held by banks, and since depositor money is backed by gov, it will effectively means tax payer will pick up the tab :) :) Thus a covered bond buyer is willing to buy this bond even at lower interest rates.
It also open way for pension/superannuation funds to become banks source of funding via covered bonds.
By intervention our govs are just shifting the can further down the road.