Covered bonds

What is a covered bond

A covered bond is a debt instrument, generally issued by a bank, that is secured by a specific pool of assets (cover pool).

The cover pool assets are owned by a separate company, called a special purpose vehicle (SPV).

Covered bonds are different to senior unsecured debt instruments issued by banks, where the bond holder is simply an unsecured creditor of the bank. They are also different to asset-backed securities, where the bond holder holds a secured interest in the cover pool but has no claim on the issuing bank.

Read our bulletin article, Discovering covered bonds – the market, the challenges, and the Reserve Bank’s response

The benefits of covered bonds 

Covered bonds offer:

• a relatively stable source of funding when financial markets are unstable
• access to funding when unsecured wholesale markets may not be stable

• a valuable extra source of long-term funding to assist banks in meeting our core funding ratio requirements for liquidity

• a potential avenue for highly rated banks to access cheaper funding.

Read more about our liquidity policy

Registration of a covered bond programme

The Reserve Bank of New Zealand (Covered Bonds) Amendment Act 2013 requires that banks only issue covered bonds under a covered bond programme registered with us. To be registered by us, banks' covered bond programmes must meet a number of requirements, including that:

• the cover pool assets are held by a special purpose vehicle that is a New Zealand incorporated company

• a cover pool monitor has been appointed to monitor the programme

• the programme documentation meets certain requirements, such as providing a solvency test for the special purpose vehicle.

These requirements are explained in detail in the Banking Supervision Handbook document 'Registration of covered bonds: process and information requirements (BS18)'.

Register and limit on issuance

We maintain a public register of registered covered bond programmes.

Go to the Register of registered covered bond programmes

We impose a limit on banks' issuance of covered bonds, via their conditions of registration. This limit is set at 10% of a bank's total assets to balance the benefits of covered bond issuance against the potential impact on unsecured creditors.

Defaults on the loans in the cover pool

The issuing bank is generally required, under its programme documentation, to maintain the quality of the cover pool. As a result, any non-performing loans, or loans that no longer meet the requirements of the cover pool, will have to be replaced by new loans from the issuing bank’s book. Given this practice may reduce the quality of the assets available to meet the claims of unsecured creditors, should the issuing bank later fail, we have set a limit on the level of a bank’s assets that may be encumbered in favour of covered bonds.

The covered bonds legislation

The Reserve Bank of New Zealand (Covered Bonds) Amendment Act 2013 gives covered bond holders greater certainty that their security interest over cover pool assets would still be enforced if the issuing bank fails. The legislation:

• clarifies the legal status of cover pools under registered covered bond programmes if the issuing bank fails
• ensures the covered bond special purpose vehicle (SPV) stays outside the failure resolution process of the issuing bank, if that bank is placed into statutory management or liquidation
• provides more transparency of covered bonds issued by New Zealand registered banks and minimum standards of monitoring.

The Reserve Bank of New Zealand (Covered Bonds) Amendment Act 2013 applies to New Zealand registered banks. However, it may be extended by regulation to other entities or classes of entities.

What assets can be included in the cover pool

We consider that the assets eligible to be included in the cover pool do not need to be prescribed by legislation because banks specify asset eligibility in programme documentation.

Legislative restrictions on cover pool assets may unnecessarily restrict an issuer’s ability to develop covered bond programmes. However, to allow for future market developments, the legislation provides that we may register covered bond programmes under class designations based on the types of assets in the cover pool. The issuing bank will be required to ensure that only the assets allowed in the asset class designation are included in the relevant cover pool.

We accept covered bonds as collateral

We accept covered bonds as collateral under our domestic market operations, subject to certain requirements being met.

Covered bonds application criteria