RBNZ sets 10 per cent limit on covered bond issuances

Last updated 15:06 21/01/2011

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Banks will have the value of covered bonds they can issue limited to 10 per cent of their total assets, the Reserve Bank says.

Covered bonds are debt securities backed by the cashflow from a specific pool of mortgages or other loans.

They are popular in Europe, but are banned in Australia because they give investors a prior claim on bank mortgages.

They differ from standard bonds in that investors have specific recourse to the assets that secure the bonds in the event of default, as well as retaining a claim on the residual assets of the issuer.

The new regulation follows the completion of a consultation process with the banks initiated last October on a regulatory framework for covered bond programmes.

Deputy Reserve Bank governor Grant Spencer said the initial limit of 10 per cent would allow banks to develop covered bond programmes, while providing a conservative ceiling on their use in the short term.

Westpac New Zealand plans to sell €1 billion (NZ$1.7b) of the bonds to European investors next month as part of a rolling €5 billion programme.

The bonds would replace short-term funding with longer dated debt.

Bank of New Zealand became the first bank in this country to issue $425 million of five and seven-year covered bonds in June as part of a planned $3m programme.

The Reserve Bank would review the 10 per cent limit in two years.

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- BusinessDay.co.nz

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