In a second hearing on a New Zealand covered bond bill yesterday (Thursday) Opposition MPs argued against the Reserve Bank of New Zealand rather than the government having the power to change a planned 10% limit for covered bond issuance, while the potential for unsecured creditors to suffer haircuts triggered follicular and other insults.

New Zealand Labour MP Clayton Cosgrove

At the House of Representatives hearing on the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill Jonathan Coleman, associate minister of finance and ruling National Party MP, introduced the draft legislation by summarising the advantages of covered bonds and detailing amendments suggested by the House’s Finance & Expenditure Committee in a report in September. (See here for previous coverage.)

The majority of the debate that followed focused on a 10% limit on the amount of assets that can be encumbered by covered bond issuance relative to the total assets of a bank.

David Parker, finance spokesperson for the opposition Labour Party, said that he would have preferred New Zealand match an Australian 8% limit based on slightly different variables, arguing that this would provide for simplicity and also be in line with a Closer Economic Relations Trade Agreement between the two countries.

However, the Opposition’s strongest criticism of the bill was that under it the Reserve Bank of New Zealand has discretion to change the 10% limit.

“We think the Reserve Bank should have to come to the Government, and say: ‘Hey, we think this should be changed,’” he said.

Clayton Cosgrove, associate finance spokesperson for Labour, suggested that the government would in future be abrogating its responsibility, seeking to say: “Don’t blame us.” He argued that the cabinet should be responsible for such a decision.

“After all, this is why these geniuses are paid sort of quarter of a million bucks a year, have a ministerial car and a house…” he added, complaining that government ministers had not reacted fast enough during the crisis and calling ruling National Party MP John Hayes “Dr Dolittle”.

Hayes responded by calling Cosgrove “that little fellow with the huge ego and no hair”, picking up on a theme introduced by Labour’s David Clark, who interjected into fellow Labour party MP Parker’s earlier comments with: “Some of us have more hair to lose than others.”

Parker had been reiterating how Labour, despite supporting the bill, was uncomfortable with it, given how covered bonds subordinate other creditors – by having a “gotcha” over the cover pool – potentially leading to bigger haircuts.

The Opposition nevertheless agreed that a limit of the magnitude being proposed was preferable to a lower level such as a 4% limit in Canada, with Parker noting that international markets are only interested in larger covered bonds and that a low limit might therefore prevent smaller New Zealand banks from participating in the market.

“Internationally, they are rather larger tranches of money, and 4% of some of our smaller banks like Kiwibank would mean that they were closed out of that market when their competitors – the big Australian banks – would be able to access the market,” he said. “We do not want to create competitive disadvantage for smaller banks in New Zealand in respect of this, because I personally do not want to prefer the interests of the bigger banks over the smaller banks.”

Kiwibank told The Covered Bond Report last year that it was considering covered bonds after Fitch said in a rating report that the bank was planning to issue covered bonds and the company Kiwi Covered Bond Trustee Limited was established. Kiwibank is New Zealand’s fifth largest bank and a subsidiary of New Zealand Post Group, which is government-owned. (See here for previous coverage.)

Government MPs had not responded to the Opposition’s comments on the bill by the time the hearing was interrupted by the end of the session. The House is due to resume hearings on Tuesday.

Quotes are based on a provisional parliamentary transcript of the hearing, which can be found here.

Video of the hearing can be viewed here.