Date 15 October 2010
Although used extensively in Europe for many years, covered bonds represent a new funding instrument for New Zealand banks. Covered bonds are debt securities backed by the cash flows from a specific pool of mortgages or other loans. They differ from standard bonds in that investors have specific recourse to the assets that secure (‘cover’) the bonds in the event of default, as well as retaining a claim on the residual assets of the issuer.
Deputy Governor Grant Spencer said covered bond programmes will 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 underway for New Zealand banks under informal guidelines and it will probably develop further without a formal regulatory framework. However, the Reserve Bank believes that some relatively minor legislative changes would usefully support the development of this market,” Mr Spencer said. “The Reserve Bank is therefore now consulting on possible legislative changes, as well as proposals for a formal limit on covered bond issuance by each bank.”
The Reserve Bank 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 currently underway.
Submissions for the consultation paper close on 19 November 2010.
The consultation paper can be accessed on the Bank’s website (http://www.rbnz.govt.nz/regulation_and_supervision/banks/).
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