A planned legislative covered bond framework in New Zealand could be in place soon after the Cabinet approved proposals last month, with the Reserve Bank of New Zealand releasing a Cabinet paper and feedback on submissions received during a consultation.

New Zealand parliament buildings

According to DZ Bank covered bond analyst Thorsten Euler, a draft bill enabling the proposed regulations could be laid before the country’s parliament “in a matter of weeks”.

The RBNZ’s consultation ended in mid-March and, according to the central bank, the Cabinet approved the legislative proposals in April.

New Zealand banks have already issued covered bonds, but without specific legislation, which the Cabinet paper says has put them at a disadvantage.

“This paper proposes a legislative framework for covered bonds, the purpose of which is to improve financial stability by ensuring that New Zealand banks have effective access to the covered bond market, as a source of long term relatively stable finance and an alternative source of bank funding,” read the paper.

“The main problem identified with current arrangements is that there is a lack of certainty over the effectiveness of legal arrangements to segregate cover pool assets from the other assets of an issuing bank. The effectiveness of asset segregation is a key element that investors take into account when investing in covered bonds. The second problem the legislation seeks to address is to ensure that there is an adequate level of independent monitoring of information provided by issuers on cover pool assets.”

There are therefore three main elements to the framework, according to the paper:

a. a requirement that covered bonds issued by New Zealand banks be registered, subject to meeting registration requirements;

b. independent monitoring of cover pools by an asset monitor; and

c. provisions to amend the Act, CIMA and the Companies Act to clarify the treatment of registered covered bonds in the event of issuer insolvency

According to the Cabinet paper, the proposed legislation would amend the RBNZ Act 1989, the Corporation (Investment & Management) Act 1989, and the Companies Act 1993.

DZ’s Euler noted that the propose regime is less detailed than, for example, Australia’s.

“We believe that creating a statutory platform for New Zealand covered bonds will be advantageous for both issuers and investors since it is likely to result in greater legal certainty for covered bond investors and will probably promote broader market acceptance of this product,” he said. “Since the government does not intend to provide a legal definition of the assets eligible for cover pools, and we understand also does not plan to specify LTV limits, investors will inevitably still need to do their own homework on the cover pools of New Zealand covered bonds in future.”

The cabinet paper can be found here and the RBNZ feedback on submissions here.