The Government has moved to provide a new legal framework for the issuance of covered bonds by New Zealand-registered banks.
The Reserve Bank of NZ (Covered Bonds) Amendment Bill, introduced to Parliament today provides for the central bank to maintain a register of banks' covered bond programmes, which the Government said would allow greater legal certainty for covered bond 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 - mortgages - called the "cover pool''.
They have been commonplace in European debt markets for many years but are relatively new to markets outside the continent.
New Zealand banks started tapping into the covered bond market as an alternative source of funding about two years ago but until last year they were illegal Australia.
The potential risk of covered bonds is that the assets available to covered bond owners may not be available to other creditors in the case of a liquidation.
Covered bonds have in the past been controversial because bond holders rank higher than depositors in the event of a bank failure.
Finance Minister Bill English said covered bonds allowed banks to diversify their funding by providing access to new investors and to a funding market that had been resilient during the global financial crisis.
English said the covered bond register would offer greater clarity for investors and depositors as to which assets were set aside for the benefit of covered bond holders.
He said the new framework will come into effect this year, with a transition period to enable the registration of existing covered bonds programmes.
In October 2010, the Reserve Bank imposed an upper limit on the amount of covered bonds issued by locally incorporated banks to a maximum of 10 per cent of the total assets of the issuing bank.
