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Moody's says covered bonds limit to support bank rating

Monday 24th January 2011

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Moody's Investors Service said that a 10% limit on the issuance of covered bonds by New Zealand banks will protect their ratings.

The Reserve Bank of New Zealand (RBNZ) said on Friday it was limiting the amount of covered bonds New Zealand banks can sell to 10% of a bank's total assets.

Bonds "covered" by a group of defined assets are controversial because they give investors a prior claim on bank mortgages. They are banned in Australia.

Concerns about covered bonds includes that they "cherry pick" the best bank assets and they can lead to secured funding concentrations. New Zealand banks have started issuing covered bonds, with BNZ leading the way.

"The RBNZ's measure limits the degree to which unsecured creditor and depositor claims are effectively subordinated by the issuance of covered bonds", said Marina Ip, an analyst at Moody's in Sydney.

The RBNZ's regulatory limit further addresses the potential for over-collateralisation - the pledging of more assets than the actual dollar value of issuance - which may occur within a covered bond structure, Moody's said.

By placing a limit on the value of assets held within the structure, rather than on the value of the securities sold to the market, unsecured creditors were not disadvantaged by pledging more assets to covered bond holders.

Moody's said there was likely to be strong investor demand for covered bonds, as they were a new pool of so called level two liquid assets under the Basel III bank liquidity regime.

Moody's has earlier said that covered bonds represent a diversification in the area of wholesale bank funding and give banks a new investor base to tap into.

The RBNZ will review the limit within the next two years. It will make further announcements on the form of the legislative support and the relevant disclosure requirements for covered bonds later this year.

 

NZPA



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