RBNZ happy for banks to launch covered bond programmes well in excess of the central bank imposed 10% cap on assets

RBNZ happy for banks to launch covered bond programmes well in excess of the central bank imposed 10% cap on assets

By Gareth Vaughan

The Reserve Bank is unconcerned that banks are launching covered bond programmes whose size is well in excess of the mandated limit, saying it's more efficient for them to do this to allow for potential regulatory changes and future asset growth.

The regulator has set a cap that lets banks use up to 10% of their total assets as collateral for covered bonds. However, two banks - ASB and Westpac - have launched covered bond programmes with values well in excess of 10% of their assets.

A Reserve Bank spokeswoman told interest.co.nz that the central bank is not concerned about this.

"The limit imposed by the Reserve Bank effectively restricts the value of assets, that a bank may encumber in favour of a covered bond programme, to 10%. (But) a bank may register a prospectus for a programme with a value that may be above that limit, as long as it does not actually encumber more than 10% of its total assets in favour of the covered bond programme," the spokeswoman said.

"It is more efficient to register a single prospectus for one programme that has sufficient headroom to allow for any regulatory changes, changes in exchange rates, balance sheet growth, etc., than to constantly register and re-register as circumstances change."

ASB has established a 7 billion euro (NZ$12.2 billion) covered bond programme and has total assets of NZ$63.1 billion. That means its programme is nearly twice the size of its NZ$6.31 billion 10% limit. Westpac has a 5 billion euro (NZ$8.7 billion) programme and total assets of NZ$56.8 billion, meaning its programme is also well in excess of its NZ$5.68 billion 10% cap.

Both banks say the programmes, with numerous actual issues of covered bonds planned over a period of several years, allow for them to grow their asset bases.

Covered bonds are senior debt instruments backed by a dedicated group of home loans assigned to provide security for the debt known as a “cover pool.” Popular in Western Europe, they are usually issued for terms of five to 10 years. The way they're structured means if the issuing bank defaults, the assets in the cover pool are carved off - or ring fenced - from the bank 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 have been banned by the Australian Prudential Regulation Authority as, in the event of a default by the bank issuer, depositors’ claims are diluted. However, the Australian government decided last December to change the law, and has introduced legislation that will allow Australian banks to issue covered bonds.

Unlike with residential mortgage backed securities (RMBS), covered bond cashflows are funded by the issuer and not by the cashflows of the mortgage pool. Covered bond investors have dual recourse to the bank and mortgage pool collateral while senior bank bond investors can only claim on the bank, and RMBS investors can only claim on the collateral. Therefore covered bonds typically carry AAA credit ratings.

ASB hasn't yet issued any covered bonds although Westpac raised 1 billion euros (NZ$1.7 billion) from overseas institutional investors in its first covered bond issue in June. Westpac subsequently pulled between NZ$60 million and NZ$80 million worth of Christchurch residential mortgages out of the pool used as collateral against its inaugural covered bond issue after the devastating February 22 earthquake.

ANZ, which has total assets of NZ$125.3 billion meaning it could issue covered bonds worth NZ$12.53 billion, has put a 5 billion euro (NZ$8.7 billion) covered bond programme in place but hasn't yet issued any covered bonds. And in four covered bond issues so far BNZ has raised about NZ$3.47  billion, reaching 60% of its Reserve Bank mandated capacity.

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11 Comments

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Unbelievable. Just as elsewhere we have a regulator which has been captured by those it is supposed to regulate.

This is Securitisation. That's what got us in this mess in the first place; selling the same assets twice, or more, over. The banks have already borrowed against their mortgages, to fund the suckers. Now they are going to re-borrow against them, again. And..

Why has Aussie recently changed its mind on this issue? Well, Greg Medcraft has recently taken up as Chairman of ASIC. Before that he was....Chief Executive Officer & Executive Director at the Australian Securitisation Forum . Coincidence?

http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/ASIC%20senior%20executives

None of this surprises me. Bollard dances to his bosses tune. We are just fodder to be used by the banks and abused by the govt and the RBNZ. Prudence went down the long drop years ago.

The liars in Europe are starting to prepare themselves to survive as pollies and bankers, with better late than never statements on how they warned everyone and did everything they could to prevent the depression and the massive MASSIVE losses, especially for the bloke in the street....humbug,

Fat arse bankers shifted their loot to save ground months ago.

Don't you worry cuz, it's all under control. There's 4 week till the next G20 meeting. As of this weekend Merkel and Szarkozy have an agreement. Next week they will say they think they have an agreement, the week after that they will announce they thought they had an agreement, and at the end of the 4th week it will be agreement? "what agreement".

Most if not all of the French banks are flat broke...stuffed....buggered...I wonder if that bloke what used to advise Labour and suggested we ought to follow the Frogs...Pagani...wonder what he has to say....hah.

Hey, Parker, I gave up reading your stuff a long time ago, because I don't know what you're saying most of the time. This one was of interest, so I gave it a go.

Writing a thesis is establishing the facts and drawing conclusions at the very end. Journalism is the opposite. State your case at the very outset then either prove it or provide authorities underneath the opening statement.

I clicked on Parkers "relevant" link (creditorbust) to his reproduction of the history of NZ banking and the BNZ. After an hour my was head spinning, thinking, zounds, jumpin jehosophat, the cads, the bounders. Having got 1/3 the way through it gave up, (strewth, how long is it) wondering where the relevance to the Rothschild letter was. I got lost. And I still dont know.

Parker, I know the Rothschilds bankrolled the Napoleonic Wars, and bankrolled the British Government in it's military campaigns in the Americas. I didnt get to the end of your history of the BNZ, but the gist of what I did get was someone was bankrolling the British in the Maori Wars. Was it the Rothschilds? Was that the point you were making? They're back? 

 Thank you again for a knowledgeable and profound article - Iain. I do understand about 80% of your comments.

Sometimes I think a number of people here - with good knowledge, enough enthusiasm for ethic and moral NZstandards and with an honest vision for the future of New Zealand should go together and start up a blog to fight the rot.

Iain, that was informative, thanks again. Andrew

One for your scrapbook Iain... hope it interests... great coverage.  

Parker. Much better. Very cogent. While you dont say it directly I deduce the Rothschilds bankrolled the confiscation of Maori lands and didn't get here until after the Maori Wars were over. (I have spent some time at the old restored British Colonial Army barracks in Taupo, built during the Maori Wars, so that was most interesting). PS a question, is the old Auckland firm of Russell & MacFarlane who had buildings in Quay Street any association with the same Russell? 

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