The Australian Securitisation Forum has been working hard to find a way to revitalise the domestic securitisation market, primarily in relation to the securitisation of residential mortgages. These efforts have become more urgent as the Australian Office of Financial Management's government-mandated purchases of mortgage-backed securities are about to come to an end.It was revealed last week that the ASF is embarking upon a multi-pronged strategy. Two key strategies are to seek the introduction of covered bonds to the Australian market and the provision of Federal government guarantee support for future RMBS issues. Covered bonds are issued by banks. The bonds benefit from the credit support provided by the issuing bank and are secured against a segregated pool of mortgages (or other high quality assets). As such, the bonds will typically have a credit rating assigned that is higher than that of the issuing bank and one that is ideally at the triple A level.  As the ASF points out, Australia and Belgium are the only OECD countries that do not permit the issuance of covered bonds. The stumbling block to date for the introduction of covered bonds in Australia has been the Australian Prudential Regulation Authority's concern that depositor protection be maintained. The introduction of covered bonds would create a class of secured creditors that would rank ahead of depositors in the event of winding up the issuing bank.The introduction of the Financial Scheme Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008 goes some way towards addressing this problem in that deposit insurance (subject to specified limits) now exists in Australia. The ASF argues that with this legislation in place, specific legislation can be introduced to allow the issuance of covered bonds and provide the legal framework for such issuance.However, to the extent that depositors have claims in excess of those covered by deposit insurance, they will have to wait to have their claims met from the proceeds of any liquidation. To this extent depositors will rank behind secured covered bond creditors.But then there has never been a guarantee that depositors would get all their money back in the past (the current GFC-invoked guarantee of deposits up to A$1 million is unprecedented and temporary). To do so would simply invite moral hazard. Savings institutions have been allowed to fail (think of Pyramid Building Society as an example) and in other cases marriages of convenience have been arranged. Perhaps depositors can take comfort from the thought that the four major banks are now of such size that they would probably be considered too large to fail, if they found themselves in difficulty.The issue for the government and regulators to address, if the issuance of covered bonds is to be permitted, is what proportion of a bank's mortgage book can be quarantined for such purposes, given that residential mortgages are the largest class of a bank's highest quality assets? The ASF makes the argument that the banks have considerably more customer assets than deposits. Indeed for the four majors, it