New disclosure required for bank covered bonds

BUSINESSDESK: New Zealand banks issuing covered bonds will be required to register their programmes with the Reserve Bank and disclose the pool of assets that investors could call on if the bank defaulted.

Covered bonds are becoming increasingly popular as a source of core funding as banks seek to bolster their balance sheets in response to tougher capital adequacy rules being imposed globally.

This is in response to banking sector under-capitalisation revealed during the 2008 global financial crisis.

Finance Minister Bill English tabled legislation covering the new regime to Parliament today, saying it would give covered bonds investors greater certainty "in the unlikely event of a bank defaulting".

The New Zealand branches of Australian banks, including Bank of New Zealand and Westpac, have issued the bonds ahead of their parent banks, as Australian restrictions on such bond issues have only recently relaxed.

Covered bonds are debt securities where the bond holder is an unsecured creditor of the issuing bank, but holds a secured interest in a separate "cover pool" of assets.

The central bank already imposes a limit on issuance of covered bonds to balance the benefits against the impact on unsecured creditors, although their value as a "long-term source of relatively stable finance" was recognised, Mr English said.

"They also allow banks to diversify their funding by providing access to new investors and to a funding market that has been very resilient, even during the global financial crisis."

The RBNZ register would offer greater clarity for investors and depositors as to which assets are set aside for the benefit of covered bond holders.

“Providing a legislative framework will give investors greater legal certainty as to the treatment of cover pool assets in the unlikely event the issuing bank defaults.

"Such frameworks already exist in most other countries with covered bond markets,” Mr English said.

The new framework is expected to come into effect this year, with a transition period to enable the registration of existing covered bonds programmes. 

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4 Comments & Questions

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Doesn't the removal of a pool of security assets for the exclusive benefit of covered bond investors undermine the security position of other depositors ?

How do these moves enhance the capital available to protect the standard public depositors?

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The argument is that by allowing the banks to issue up to 10% of their balance sheet in covered bonds it diversifies the bank's funding and makes them more sound whilst not substantially exposing the standard depositor. The problem I have is that if a bank issues up to 10% then they can no longer access this source of funding in times of market stress.... then the benefit of "covereds" is lost.

I do wonder how banks can justify calling their standard bond issues 'senior' when clearly they are subordinated to the covered bond investors.

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Covered Bonds are a rort on the normal investors.

When normal investors invest they are not told that while their 3 year term deposit is in place that the bank they invest with may resecure the best 10% of the banks assets at a prefered interest rate to a " prefered party" being the covered bonds.

This is no different to the finance companies like Hanover Finance and Strategic Finance resecuring prime assets to prefered parties such as Bank of Scotland or Fortress on preferential terms - leaving the normal investors with the crums

As we all now know, Banks can fail and do - with the events in Europe in recent days and with Greece and Spain on theverge of collapse again, this could reverberate back to Australasia where our banks are based.

Stop this nonsense now. It is daylight robbery and not transparent to the investing public

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So which banks in NZ do not issue covered bonds? Or are they all at it?

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