New Zealand’s central bank said in a Financial Stability Report released today (Thursday) that it will soon be consulting on a legislative framework for covered bond issuance by New Zealand banks.

“The objective of a legislative framework would be to create greater certainty as to the treatment of covered bonds in the event an issuing bank was placed into statutory management,” it said.

According to the report, the main elements proposed are a registration system for covered bond programmes, and amendments to the statutory management regime to ensure that the resolution process relating to a failing bank is separate from the resolution process for a covered bond programme.

The Reserve Bank of New Zealand in October 2010 launched a consultation proposing a formal regulatory framework to support issuance of covered bonds, and in January 2011 announced a 10% limit on the amount of assets allowed to be encumbered by covered bond issuance. At the time it said that further announcements on the form of the legislative support and the relevant disclosure requirements would follow later this year.

The central bank’s latest Financial Stability Report said that new issuance of covered bonds is likely to provide some of the core funding that New Zealand banks will need to raise in the coming months to maintain levels as covered bond markets “have generally continued to function well with little change in spreads”.

However, it said that covered bonds will only be able to provide a portion of these funding needs on account of the asset encumbrance limit.

Bank long term wholesale funding costs (relative to swap rates)

Source: Bloomberg, RBNZ calculations. Note: Based on a combination of secondary traded spreads and spreads at issue for bonds issued by New Zealand banks