close
MENU
2 mins to read

Reserve Bank consults on covered bonds

The Reserve Bank of New Zealand (RBNZ) is consulting on possible legislative changes, as well as proposals for a formal limit on covered bonds.A covered bond is a class of corporate bond where the coupon of the bond and the repayment of the principal is &

NZPA
Fri, 15 Oct 2010

The Reserve Bank of New Zealand (RBNZ) is consulting on possible legislative changes, as well as proposals for a formal limit on covered bonds.

A covered bond is a class of corporate bond where the coupon of the bond and the repayment of the principal is "guaranteed" or "covered" by assets in a specific pool of collateral.

The bonds are controversial because the ring-fencing of a proportion of the bank's high-quality assets has the effect of reducing the assets available to a statutory manager in a failure.

The bonds are not permitted in Australia and in some countries they are covered by legislation.

BNZ issued $425 million of covered bonds in the New Zealand domestic market in June and other banks are developing programmes.

RBNZ deputy governor Grant Spencer said covered bond programmes would benefit the New Zealand banking system through a broadening of international funding sources, particularly for the issuance of long term debt.

"The covered bond market is already under way for New Zealand banks under informal guidelines and it will probably develop further without a formal regulatory framework. However, the RBNZ believes that some relatively minor legislative changes would usefully support the development of this market," Dr Spencer said.

The RBNZ is consulting on possible legislative changes, as well as proposals for a formal limit on covered bond issuance by each bank.

It also intends to introduce new disclosure requirements to ensure that the impact of covered bond issuance is transparent. It will do this in the context of the wider bank disclosure review.

At present, there is nothing in the RBNZ's prudential requirements or New Zealand law prohibiting or limiting the issue of covered bonds, the consultation paper says.

There is also no legislation supporting them beyond contract law so covered bonds issued in New Zealand are "structured" covered bonds.

The paper said that on balance, the RBNZ considers that there are likely to be material benefits from legislative backing for covered bonds in New Zealand. The extent to which these benefits can be maximised will depend on the design of the legislation and the paper suggests several possibilities.

The RBNZ said it had preliminary discussions about covered bonds with banks in 2008 and indicated privately it would be content with conservative levels of covered bonds.

"We propose to limit the issuance of covered bonds to 10 percent of total assets. The Reserve Bank will review the appropriateness of this limit within two years pending an assessment of market developments," the paper said.

The RBNZ believes banks are too reliant on short-term funding and sees the developments of a covered bond market as an additional source of local long-term funding.

It said there is uncertainty surrounding precisely how rating agencies will respond to increasing issuance of covered bonds from a New Zealand institutions.

Submissions for the consultation paper close on November 19.

NZPA
Fri, 15 Oct 2010
© All content copyright NBR. Do not reproduce in any form without permission, even if you have a paid subscription.
Reserve Bank consults on covered bonds
9461
false