By Gareth Vaughan
BNZ, the only local bank to issue covered bonds so far, backs the Reserve Bank's push for legislation enshrining the rights of foreign covered bond investors to mortgages written by New Zealand banks ahead of local bank depositors as it moves to issue covered bonds to overseas investors.
Andrew Thorburn, BNZ's chief executive, told interest.co.nz that the Reserve Bank's recently released consultation paper on covered bonds was comprehensive and broad.
'I think what they’re proposing is very sensible, sound and rigorous," Thorburn said.
Covered bonds are senior debt instruments issued by a bank, usually of five-to-ten year durations, and backed by a dedicated group of home loans known as a “cover pool.” If the issuing bank becomes insolvent, the assets in the cover pool are carved off from the issuer’s other assets solely for the benefit of the covered bondholders. This ring fencing of a chunk of a bank’s balance sheet is why covered bonds are banned by the Australian Prudential Regulation Authority as, in the event of a default by the bank issuer, depositors’ claims are diluted.
In its consultation paper the Reserve Bank says it would be happy for banks to issue covered bonds worth up to 10% of their total assets, based on the value of assets securitised.This is up from its previous guideline of 5% and means ASB, ANZ, BNZ, Westpac and Kiwibank combined, could potentially issue covered bonds worth about NZ$32 billion.
The central bank is also proposing legislation to enshrine covered bondholders' interests in law, which it says will help attract overseas investors to covered bonds issued by New Zealand banks.
Thorburn said moving the threshold up to 10% from 5% wasn’t inappropriate.
"There are a number of other markets, particularly in Europe, where they’re quite a bit higher and I think having some sensible legislative protection does make sense," said Thorburn.
"We want to have a market that is well regulated and orderly and I think that’s a step in that direction."
BNZ completed a NZ$425 million covered bond issue to domestic institutional investors in June, its first step in a NZ$3 billion covered bonds programme. Thorburn said the bank was now eyeing up overseas investors.
"Yes, we have had some interest from international investors. They’re keen to know some more and we’ll be talking to them over the next period up till Christmas."
The push towards covered bonds follows the introduction of the Reserve Bank’s core funding ratio (CFR) on April 1. The CFR requires banks to source 65% of their funding from either retail deposits or long-term wholesale funding with maturities of more than one year. The central bank aims to lift the CFR to 75% by mid-2012.
Thorburn said the issuing of covered bonds created an important new market securing longer-term funding that would help reduce banks' reliance on short-term international wholesale funding.
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