RBNZ consults on covered bonds legal framework
The Reserve Bank released a consultation paper (PDF 188KB) today proposing a legislative framework for covered bonds issued by New Zealand banks.
Covered bonds are debt securities issued by banks, where the bond holder is both an unsecured creditor of the bank and holds a secured interest in a pool of assets, called the cover pool.
Reserve Bank Deputy Governor Grant Spencer said: "Covered bonds can provide banks with access to a stable funding source, which helps support system stability during times of severe disruption in international markets.
"The proposed legislative framework aims to provide investors with legal certainty as to the treatment of cover pool assets in the unlikely event that the issuing bank becomes insolvent," he said. "Legislative frameworks exist in most other countries with covered bond markets."
Key elements of the proposed framework are that:
- covered bond issues must be registered with the Reserve Bank;
- the cover pool assets must be held by a special purpose vehicle; and
- an asset pool monitor must also be appointed to monitor the cover pool.
The Reserve Bank expects that existing covered bonds can easily be brought within this proposed framework.
Following a previous consultation in October 2010, the Reserve Bank imposed an upper limit on the amount of covered bonds that can be issued by locally incorporated banks. This limit was imposed in March 2011 and was set at 10 percent of the total assets of the issuing bank, with the limit calculated on the value of assets encumbered for the benefit of covered bond holders.
The consultation paper is available from the Reserve Bank's website.
The Reserve Bank welcomes submissions by 16 March 2012.
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