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RBNZ sets limit for covered bonds at 10 percent of assets

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Fuseworks Media
Fuseworks Media

Wellington, Jan 21 NZPA - The Reserve Bank of New Zealand (RBNZ) is limiting the amount of covered bonds New Zealand banks can sell to 10 percent of a bank's total assets.

"An initial limit of 10 percent will allow banks to develop covered bond programmes, whilst providing a conservative ceiling on issuance in the short-term," deputy governor Grant Spencer said.

The central bank will review the limit within the next two years. The bank will make further announcements on the form of the legislative support and the relevant disclosure requirements for covered bonds later this year.

Bonds "covered" by a group of defined bank assets are controversial because they give investors a prior claim on bank mortgages. They are banned in Australia.

New Zealand banks have started issuing covered bonds, with the Bank of New Zealand leading the way.

Moody's Investors Service has said that covered bonds represent a diversification in the area of wholesale bank funding and give banks a new investor base to tap into.

Concerns about covered bonds includes that they "cherry pick" the best bank assets and they can lead to secured funding concentrations.

RBNZ governor Alan Bollard has said that Australasian banks had relied heavily on short-term foreign funding and that proved a vulnerability in the global financial crisis.

"For that reason we have put in place a liquidity policy requiring banks to hold longer-term foreign funding plus retail deposits to meet an increasing core funding ratio."

The central bank has completed a consultation initiated last October on the introduction of a regulatory framework for covered bond programmes.

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