Covered bond issuance by New Zealand banks will for the next two years be subject to a limit whereby assets encumbered for the benefit of covered bondholders cannot exceed 10% of total assets.

The limit was announced today (Friday) by the Reserve Bank of New Zealand, following the end of a consultation on the introduction of a regulatory framework for covered bonds that was launched last October.

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

He said that the central bank will review the appropriateness of the limit within the next two years. The RBNZ will announce details of legislative support and disclosure requirements for issuance later this year.

Unlike limits set by some other regulators, which base their limit on issuance relative to total assets or liabilities, New Zealand references the amount of assets encumbered for the benefit of covered bondholders.

Regulators have typically set limits on covered bond issuance because it subordinates the claims on a bank’s assets of senior unsecured bondholders and, most importantly, depositors. However, as overcollateralisation levels change over time, the amount of assets encumbered in favour of covered bondholders will change even if the amount of issuance remains consistent. The RBNZ’s limit relative to encumbered assets will therefore give it more control over the extent to which other bank creditors are subordinated.

Bank of New Zealand opened the New Zealand covered bond market last June, with a NZ$425m two tranche domestic issue, and followed this up with a Eu1bn seven year deal in November.

“This inaugural euro covered bond issue is a very cost effective form of term funding for BNZ,” said Tim Main, BNZ treasurer. “It also increases the bank’s access to a significantly broader range of global investors.”

Westpac NZ will begin roadshowing a new covered bond programme shortly. Barclays Capital, BNP Paribas, UBS and Westpac have the mandate for the subsidiary of Australia’s Westpac.

In December a new company, ANZNB Covered Bond Trust Ltd, was established, suggesting that ANZ National Bank will be entering the market, while ASB Bank, a subsidiary of Commonwealth Bank of Australia, has indicated an interest in issuing covered bonds.