Greater certainty for covered bond investors

A new legislative framework for the issuance of covered bonds by New Zealand registered banks will provide greater clarity for investors and depositors, Finance Minister Bill English says.

The Reserve Bank of New Zealand (Covered Bonds) Amendment Bill, introduced to Parliament today, provides for the Reserve Bank to maintain a register of banks’ covered bond programmes and provides greater legal certainty for investors in the unlikely event of a bank defaulting.

Covered bonds are debt securities where the bond holder is an unsecured creditor of the issuing bank, but holds a secured interest in a separate pool of assets called the ‘cover pool’.

“Covered bonds can have significant benefits for registered banks as a long-term source of relatively stable finance. They also allow banks to diversify their funding by providing access to new investors and to a funding market that has been very resilient, even during the global financial crisis,” Mr English says.

“The register will offer greater clarity for investors and depositors as to which assets are set aside for the benefit of covered bond holders.”

The Reserve Bank already imposes a limit on issuance of covered bonds, which balances the benefits of covered bond issuance against the impact on unsecured creditors.

“Providing a legislative framework will give investors greater legal certainty as to the treatment of cover pool assets in the unlikely event that the issuing bank defaults. Such frameworks already exist in most other countries with covered bond markets,” Mr English says.

It is intended the new framework will come into effect this year, with a transition period to enable the registration of existing covered bonds programmes.