Parliamentary select committee rubber stamps covered bond bill saying such bonds could mean higher deposit rates for bank depositors

Parliamentary select committee rubber stamps covered bond bill saying such bonds could mean higher deposit rates for bank depositors

By Gareth Vaughan

A Parliamentary select committee is recommending a bill enshrining covered bonds in law be passed, arguing the controversial bank funding tool ought to reduce the likelihood of a bank default and, potentially, see banks' reduced funding costs passed on to depositors through higher deposit rates.

The report from Parliament's Finance and Expenditure Committee, chaired by the National Party's Todd McClay, was released yesterday. It recommends the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill be passed with minor amendments "generally in the nature of clarification." The report says the risks covered bonds create for unsecured creditors such as bank depositors are justified.

"We have given careful thought to the ways in which covered bonds may affect the risks faced by ordinary depositors. Because the holders of covered bonds would have preferential access to certain of the issuing bank’s assets in the event of default, this would subordinate the claims of depositors and other unsecured creditors on the assets placed in the cover pool," the report says.

"We have sought to weigh up this increased risk for unsecured creditors against the benefits offered by issuing covered bonds. The main benefit is the reduced likelihood that a bank will default in times of financial market stress, because the ability to issue covered bonds improves banks’ access to longer-term, relatively secure funding. Another potential benefit is that the reduced funding costs for banks from issuing covered bonds may be passed on to unsecured creditors if banks can pay higher deposit rates."

"On balance, we consider that the risks to unsecured creditors are justified provided their application is limited to a conservative proportion of a bank’s assets."

Covered bonds are dual-recourse securities, issued for anywhere from three to 10 years, through which bondholders have both an unsecured claim on the issuing bank (should it default on the bonds) and hold a secured interest over a specific pool of assets - generally residential mortgages - called the cover pool.

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

Due to their dual recourse security, covered bonds generally attract the highest possible AAA credit rating (which is higher than the bank issuer's own AA- ratings in the case of New Zealand's big four banks) and are therefore a cheaper form of funding for banks than standard bank bonds. In the most recent covered bond issue by a New Zealand bank, ANZ New Zealand borrowed €750 million (about NZ$1.2 billion) earlier this month in a five-year issue paying investors a coupon of 1.375%. The ultimate cost to the bank does, however, also include the cost of converting the euros into New Zealand dollars, which is said to add about 100 basis points.

Aussie ban now overturned

Because covered bonds carve off some of the banks' best assets for the benefit of covered bondholders - in the event of a bank default - bank depositors' claims are diluted. This meant covered bonds were banned in Australia by the Australian Prudential Regulation Authority until last year when the federal government, after lobbying by the major banks, enacted legislation allowing covered bonds.

Critics argue covered bond legislation will effectively enshrine the rights of investors, mostly European institutional ones, to some of the residential mortgages written by New Zealand banks ahead of local bank depositors, who currently have about NZ$108 billion in term deposits in New Zealand's banks.

However, the Bill attracted just six submissions with only one, from Geoff Bertram, a former senior lecturer in economics at Victoria University and senior associate at Victoria's Institute of Policy Studies, opposing it. Bertram argued the fact a bill establishing a legislative basis for covered bonds was even before Parliament showed "regulatory capture" of the Reserve Bank by the banking industry given covered bonds should explicitly be prohibited by law.

Introducing the Bill to Parliament in May, Finance Minister Bill English said it would provide greater legal certainty for investors in the unlikely event of a bank defaulting. English also said covered bonds offered significant benefits for banks as a long-term source of relatively stable finance.

The country's big four banks - ANZ NZ, ASB, BNZ and Westpac NZ - have already borrowed more than NZ$11 billion through issuing covered bonds with the Reserve Bank's approval, since BNZ became the first to do so in 2010. State owned Kiwibank is now developing a covered bond programme, with the assistance of Barclays Capital and Chapman Tripp. The select committee recommends existing covered bond programmes be registered with the Reserve Bank within nine months of the Bill passing into law, up from the six months suggested in the Bill itself.

The Reserve Bank has imposed a 10% limit on the proportion of a bank’s assets that may be encumbered in favour of covered bonds as a condition of banks’ registration. The Bill itself doesn't specify any limit, with the current arrangement expected to continue.

In report the select committee members say they considered whether the 10% limit was sufficiently conservative, and whether the limit should be specified through the Bill. They note Australia has imposed an 8% limit, but say this is comparable to the New Zealand requirement because the Australian limit merely applies at the time of issuance, whereas New Zealand’s applies on an ongoing basis, and banks tend to stop below 10% to ensure they don't exceed the limit.

"We understand that a low limit of 4%, as applied in some countries, such as Canada, would be likely to preclude all but the largest New Zealand banks from issuing covered bonds," the select committee says.

"It is of interest that ratings agencies have assessed the issuance of covered bonds by New Zealand banks with a 10% limit as 'ratings positive' for unsecured debt; that is, that the benefits outweigh any risks to unsecured creditors. After considering all these factors, we have concluded that a 10% issuance limit as currently imposed is appropriate."

10% limit could be lifted

Nonetheless the report says changing market circumstances could make it desirable for the limit to be "revised." For example, if bank funding conditions toughened, the select committee says it might be "considered prudent" to let banks encumber assets above the 10% limit for a period.

"We have therefore considered whether the issuance limit should be imposed as a condition of bank registration, as currently enforced by the Reserve Bank, or by means of primary legislation. Some of us consider that the issuance of covered bonds involves a matter of policy, given the increased risk for ordinary depositors entailed in a bank encumbering assets in favour of covered bonds," the report says.

"Some of us therefore consider that any increase in the limit is a matter that should be authorised by regulation at the direction of the Minister, rather than left to the delegated authority of the Governor of the
Reserve Bank; this would provide an appropriate additional check on, and transparency in, such a decision."

That said, the majority of committee members believe the current arrangement provides important flexibility, that would prove advantageous in any financial crisis when rapid responses to market developments might be needed.

"The majority of us note that the Reserve Bank has been entrusted with discretion in relation to the prudential requirements it places on banks in order to maintain financial stability, and believe a similar situation applies here. We therefore do not recommend any change to the current arrangement for specifying and enforcing the limit."

Aside from McClay, members of the select committee include National's Maggie Barry, David Bennett, Paul Goldsmith, John Hayes and Nick Smith, Labour's David Parker, David Clark and Clayton Cosgrove, Greens co-leader Russel Norman and NZ First leader Winston Peters.

Also see: What covered bonds mean for ma & pa.

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Probably a good move but I'd like to see that 10% as a cast in stone limit (ie legal limit) and not one like the LVR the banks can set anywhere they feel is FFS dont allow self-regulation.

"A Parliamentary select committee is".....recovering from a deluge of parasite lobby pressure that convinced them to find exactly what the banks determined would be decided...this is called democracy...haha

Cowards and Traitors

Andrew you are right. My blood starts boiling!

Covered bonds result in higher deposit rates??? Yeah right. Would you care to explain how much more depositors supposedly will benefit???
What Covered bonds do, is allow banks to borrow large amounts of money at a cheap rate mostly from offshore (which they can then lend out at a huge margin) in the process providing further fuel to the housing market.
It creates more money chasing fewer assets. This product isn't available to your avergae Joe. 
If banks were forced to borrow more money from within New Zealand deposit rates would be higher and so would borrowing costs. But at least it would mean that housing was more affordable and our depositors actually would be getting a higher rate.

JT, Well said. Apart from adding risk to our depositors (and taxpayers who would in the end have to bail them out); we don't need or want the foreign money. It only makes the current account worse.

Todd McClay reckons .....
"Another potential benefit is that the reduced funding costs for banks from issuing covered bonds may be passed on to unsecured creditors if banks can pay higher deposit rates."
This guy hasn't done a day of real work in his life, and obviously doesn't know jack sh*t about how banks work.
His Bio proudly notes his background in lobbying and politics.
And yet here he is, rubber stamping peoples life savings away.

Haha quite funny......but also tragic.

Moa man if you cling to one aspect yes......The situation though isnt so myopic IMHO. 
I would have agreed for instance that the banks in order to get lower cost longer term funding offer AAA grade securities. That I would have expected means the banks are not so reliant on ultra short term funding and can continue to function in an event rtaher than quickly close their doors.
Consider that situation where liquidity is paramount.  That the AAA backers have to wait some time to get their money, they are less liquid meanwhile the likes of you and I can transfer money or withdraw cash in minutes we are highly liquid by comparison.  That for me is a huge time window of opportunity that we as un-secured can use to our advantage to the detriment of the so called secure bond holders.  Their so called AAA if its the last man standing takes the WHOLE loss....while we had time to exit and shove it under the bed or another safer bank.

Steven, although i think you have the best of intentions, i must disagree on relying on a bank to transfer your funds in a matter of minutes. This is not the experience i have found, even in normal conditions, let alone in the midst of a  Bank run.
I posted a week or so ago, on one of Amanda's threads, about my experience with Westpac only offering a bank cheque for an account withdrawal. They refused to electronicly process it.   That's a 3 day limbo, before its cleared funds, in the new account.
It was a significant deposit, 3+ million, on call. The Westpac manger concerned, before i decided to move it , would often ring me up, offering a 'managers special rate' for a longer term.  But i would always tell him, i am happy with call, i am happy with liquidity.
And look what happened, in normal conditions.
God knows what they would try in a time of crisis.

A Parliamentary select committee is recommending a bill enshrining covered bonds in law be passed, arguing the controversial bank funding tool ought to reduce the likelihood of a bank default and, potentially, see banks' reduced funding costs passed on to depositors through higher deposit rates.
It's a laugh a minute - since when were banks thinking of the welfare of their depositors any more than the RBNZ does - banking is a game of maximising spread return, nothing else. 
I have never read so much nonsense in all my life - talk about spin to sell a bad idea to the unsuspecting.
Geoff Bertram, thanks, once again, for your lone effort on our behalf.

However, the Bill attracted just six submissions with only one, from Geoff Bertram, a former senior lecturer in economics at Victoria University and senior associate at Victoria's Institute of Policy Studies, opposing it. Bertram argued the fact a bill establishing a legislative basis for covered bonds was even before Parliament showed "regulatory capture" of the Reserve Bank by the banking industry given covered bonds should explicitly be prohibited by law.
Regulatory capture...yes that right...uh one...
While it won't surprise some here who's running the show, it's always nice to have confirmation......
So let's just get this right shall we.
It takes 285,000 signatures to force a referendum  to attempt to overturn assett sales.
It takes a lobby of the big Four banks to get a covered bonds bill pushed through......?
 Well peons it is clear  285000 of you are not worth the same considerations doled out to the Banks to underwrite their dodgy mortgage lending....and cop this it's flexible, even though the RBNZ imposes a 10% threshold.
All this just as the IMF get through telling us Australasian banks are  heavily exposed in the borrowing market , but ...think.,.. yes I said think ,they could stand a stress test......are you following this........?
All under the guise of investor protection.......I really hope that kind of smug isn't catchy.

Yes peons indeed, but I think there is advantage in knowing you are.  Its up to you then if you act like a lemming or not isnt it.

This is a bloody outrage.......look out Wheedler , it's going to be a baptism of fire.

He's in the loop - if I am not wrong Wheeler is an ex World Bank devotee - the same outfit or one of it's subs that thought it was approriate to issue New Zealand dollar Uridashi bonds at a rate below that which the government could issue debt - in effect they credit wrapped through the swap market cheap credit to NZ banks below the OCR rate Bollard was raising to stop excessive bank lending to housing in the 2004 -2008 period.

Gareth , excuse my manners, great article by the way , nice job, well done......even though it has really really pissed me off.

"On balance, we consider that the risks to unsecured creditors are justified provided their application is limited to a conservative proportion of a bank’s assets."
Maybe we should set up a Covered Bond issued over 10% of all politicians incomes.  It would only be a conservative proportion of their incomes....

In reality the committee has voted to ensure pollies do not lose on their land investments.

Perhaps we should all transfer our deposits to Kiwi Bank which although it looks as if it too is going to covered bonds, does offer a Goverment guarantee through NZ Post.  The others do not offer a guarantee and I cannot see any Australian Government agreeing to guarantee any New Zealand depositor in one of the Aussie Bank subsidiaries

Yes its interesting once the open doors policy comes in is  Govn support as guaranteed? does it make no difference? suspect the latter.  So Govn's will have to step in to guarantee depositors or the money will run out very fast.  Funny thing but the 10% carved off might be the last thing in a bank as domestic depositors desert first because they can. Maybe our Govn will end up stepping in to guarantee overseas investors......ouch.
I dont think its any less likely that our big 4 will be left to sink or swim while kiwi is bailed, any one of those folding will cause a run on the its all in together.

I am intrigued Patricia, are deposits in KiwiBank, Govt guaranteed?
Through NZ Post, via govt shareholding.
Is it an implicit or explicit guarantee?

Apparently it is indirectly through NZ. Post vis the Government shareholding but as it is indirect I have never known if the chips were down whether it would hold.  I also heard that the reason NZ guaranteed all those Finance Companies was because Australia had guaranteed all their deposits in their Banks etc over there  and that there would have been a flood of money out of NZ.   Once again I can't see Oz paying out every Tom Dick and Harry.  Iceland is a good example of that

NZ covering kiwibank is at best an implicit guarantee, but I suspect its as much a gurantee as you will get.  Bear in mind since kiwibank is small enough to fail and the Govn owns some of it then its arguable that they might let it go...especially once the open doors policy is in place....but the ramifications would be horrific IMHO so I cant see it.  There would be huge bank runs on the other 4 straight away and the smaller ones CO-OP would be toast IMHO.
Maybe it depends who is in power, Labour wouldnt IMHO let it fail, National may well.  It would suit their ideology and in fact be a slap at Labour, "oh look the bank you created has failed, a classic example of why Govn's shouldnt be in business" if we had ACT in charge I think they would and bugger it...
In 2008 the NZ govn guaranteed the NZ banks because otherwise all depositors would have fled to OZ, though whether NZ depositors in OZ would be covered is another matter?
Same with finance companies, they are the life blood of small businesses and OAPs income if they were not covered they would all go out of business in months.  Indeed right now I think many OAPs are in bank deposits to frightened to do anything else. 
So the voter backlash if not covering the banks would have been / be un-believable IMHO.

I can work out most of the acronyms used on this site but what does IMHO stand for

Patricia  - NZ Post extends a guarantee to Kiwibank - but the Government doesn't guarantee NZ Post and as part of the SOE arrangement the Government is explicitly barred from doing so.

Thank you Stephen, I didn't know that

However, mail volumes are in free fall. It had forecast a drop of 5 per cent a year as the long-term trend to electronic mail bit. But in the six months to the end of December 2011 the decline had steepened to 7 per cent; the fastest ever, "which may be the new norm", Cullen said. "The trend will not reverse and cannot be ignored."
NZ Post's falling mail volumes may point to a fall off in Trademe postal demand no longer offsetting email destruction of letter deliveries.
I was puzzled by this latest price increase from Trademe - but no longer - it's the traditional NZ business way of hoping to rort those still able to pay as those least able to fall by the wayside.

Fairfax has an even bigger problem....interesting the rent they think they can get....quite a big cut.....

I get the feeling that Fairfax will squeeze the Trademe orange a little too hard and, when there has been too much juice extracted, open the doors to the the opposition.
While the barrier to entry is highdue to the critical mass, the charges Fairfax are charging, are lowering the barrier to entry, by increasing the chance another player will start to attract their market share.

 I cannot beleive the stupidity of this legislation, that gives away the ownership of your deposit at your loacl bank if it gets into trouble.  Its the same as the banks creditors selling up your mortgage free neighbours house, to recover a loan you defaulted on. Legalise that and banks could borrow at even lower rates, and I am sure they would pass on a share of the increased margin they make to your neighbour for offering up his house, without his permission,  to secure your loan!!! Teah right, makes as much sense as a cover bond!
Just as Australia is heading for a slow down, with banks that have a loan to depsoit ratio high than banks across Europe and the US and only slightly lees that banks in the UK. Aussie banks may well turn out to be not as smart as alot of people expect. look here.
In fact the whole coverd bond issue shows how out of their depth politicians are, or is it that they are corrupted by the desire to remain in power. Consider the main justification for the legislation, which is to reduce borrowing cost to banks. Why does a covered bond have this effect? Because it gives a lender access to some one elses money, money, that the bank never had to earn. DO depositors sign over the authority for a bank creditor to take their money? NO. Will many depositors even understand that their savings are at risk in this way? NO They won't untill its too late.
If a money market is raising the cost of borrowing to a particular bank there is a reason, it is related to risk. For politicians to come along and cahnge the rules to mask that risk is not serving the country, its serving the banks. 
By lowering the cost of borrowing, it will only help keep the housing bubble in Auckland going longer, ensureing when the correction comes it will be a bigger disaster than it need be.
Lastly, when there is a decline in house prices, and should a bank run into trouble, and  the deposit accounts of savers are all cleaned out, what do you think will happen? Of course facing political annhiliation, the government will run in bailout the bank at the cost of tax payers and hey presto another Ireland or Spain.
But hey WTF would I know.

Give it a rest spammer

Steven, so your one of the NZ wowzers, thats been complicit in taking the country from one of the higher standards of living to one of the lowest in the OECD, whos killed of the "can do" attitude to the "can you help me' attitude. Any one who proposes a government leaving me a lone type value is labeld a neo con.. Your the type that makes me feel I'd made the right decision by leaving NZ, with your judgmental attitude, meddling in people lives, "stand back stand back I'm what you need" I know your type, right out of the Clark, Lange play book. While good luck to your wowsy ways, one thing it is good for. A long laugh!!

Why do you think you are entitled to post commercial links for free?  just what is the difference between your posts and others asking for help? kettle calling pot black I think.
In terms of "Im what you need" actually no.....that is not how I think....I much prefer to mind my own business but I will step in if others appear to need help...or ask if I have to.....its known as being part of a society and that has responsibilities as well as rights on many levels.
In terms of Lange,
1) I wasnt here, I'd have been voting Maggie Thatcher and John Major at the time.
I have had the honour though to meet him on 3 occasions, and I consider myself lucky to have met a great person.
HC etc
2) Ive never party voted UK or NZ Labour and I dont think I ever will.
Now an excellent candidate yes I could vote for the person or vote anti-asshole (vote to get peter dunne out springs to mind)

Seen what Kiwibank deposit rates are like!!!!!!!
Obviously they do not want new money at present.

are the others as bad?  Ive seen some other articles suggesting, yes they cant be bothered as there is in-adequate lending.....kind of interesting....same with some finance companies?

Steven, leaving a link to a website is called social network marketing, the owners of this publication can choose to stop it form happening if they like. My business is related to the issues cover here. Its an alternative to the traditional and general investments, it will not suit everbody so they make a choice. Its freedom, long since lost popularity, in the nanny state where the powers that be are pushing savers returns below inflation and into the bubble that is government bonds. The effect of which will become clear in the not to distant future. 
Social networking is actually a boom for small business allowing small business to get their message to people that would not other wise heard over the crowded and hughly expensive traditional advertising routes, which are beyond the budget of a business like mine.
But I guess the wowser brigade will want that shut down too, they hate to see some one have a crack at financial independance. Better keep them like a mushroom, if you know what I mean!

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