RBNZ sets limit for covered bonds at 10% of assets

Friday 21st January 2011 1 Comment

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

"An initial limit of 10% will allow banks to develop covered bond programmes, whilst providing a conservative ceiling on issuance in the short-term," deputy governor Grant Spencer said.

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

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

New Zealand banks have started issuing covered bonds, with the Bank of New Zealand leading the way.

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

Concerns about covered bonds includes that they "cherry pick" the best bank assets and they can lead to secured funding concentrations.

RBNZ governor Alan Bollard has said that Australasian banks had relied heavily on short-term foreign funding and that proved a vulnerability in the global financial crisis.

"For that reason we have put in place a liquidity policy requiring banks to hold longer-term foreign funding plus retail deposits to meet an increasing core funding ratio."

The central bank has completed a consultation initiated last October on the introduction of a regulatory framework for covered bond programmes.

NZPA

Comments from our readers

On 22 January 2011 at 11:52 am harold said:

So when it all goes pear shaped (again) the covered bond holders will grab all the banks assets (since the banks assets are assessed on a fractional basis - 1 dollar in deposits creates 10 dollars in loans) and depositors will be left holding the bag. Australia is right in banning these things.