By Gareth Vaughan
BNZ, the only local bank to issue covered bonds so far, backs the Reserve Bank's push for legislation enshrining the rights of foreign covered bond investors to mortgages written by New Zealand banks ahead of local bank depositors as it moves to issue covered bonds to overseas investors.
Andrew Thorburn, BNZ's chief executive, told interest.co.nz that the Reserve Bank's recently released consultation paper on covered bonds was comprehensive and broad.
'I think what they’re proposing is very sensible, sound and rigorous," Thorburn said.
Covered bonds are senior debt instruments issued by a bank, usually of five-to-ten year durations, and backed by a dedicated group of home loans known as a “cover pool.” If the issuing bank becomes insolvent, the assets in the cover pool are carved off from the issuer’s other assets solely for the benefit of the covered bondholders. This ring fencing of a chunk of a bank’s balance sheet is why covered bonds are banned by the Australian Prudential Regulation Authority as, in the event of a default by the bank issuer, depositors’ claims are diluted.
In its consultation paper the Reserve Bank says it would be happy for banks to issue covered bonds worth up to 10% of their total assets, based on the value of assets securitised.This is up from its previous guideline of 5% and means ASB, ANZ, BNZ, Westpac and Kiwibank combined, could potentially issue covered bonds worth about NZ$32 billion.
The central bank is also proposing legislation to enshrine covered bondholders' interests in law, which it says will help attract overseas investors to covered bonds issued by New Zealand banks.
Thorburn said moving the threshold up to 10% from 5% wasn’t inappropriate.
"There are a number of other markets, particularly in Europe, where they’re quite a bit higher and I think having some sensible legislative protection does make sense," said Thorburn.
"We want to have a market that is well regulated and orderly and I think that’s a step in that direction."
BNZ completed a NZ$425 million covered bond issue to domestic institutional investors in June, its first step in a NZ$3 billion covered bonds programme. Thorburn said the bank was now eyeing up overseas investors.
"Yes, we have had some interest from international investors. They’re keen to know some more and we’ll be talking to them over the next period up till Christmas."
The push towards covered bonds follows the introduction of the Reserve Bank’s core funding ratio (CFR) on April 1. The CFR requires banks to source 65% of their funding from either retail deposits or long-term wholesale funding with maturities of more than one year. The central bank aims to lift the CFR to 75% by mid-2012.
Thorburn said the issuing of covered bonds created an important new market securing longer-term funding that would help reduce banks' reliance on short-term international wholesale funding.
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6 Comments
Without covered bonds, would savers (NZ depositors) be worse off, or better off?
Does NZ have a savings problem ? Does the introduction of covered bonds work for or against this issue?
Without covered bonds, would the OCR be hiked sooner of later?
Without covered bonds, would our export led recovery be more, or less supported, wrt to resultant NZD influence?
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10683678&ref=rss
Cheers, Les.
PS - Wally, I remember well when CFR was being proposed that you quickly highlighted the possibility of loop-holing via SPVs.
PPS - re. the dives with SF, were you stripping copper even back then?
PPPS - the remainder of the $40bio export sector is looking forward to it's approx. (600+80)/600 currency offset subsidy that Wellywood just enjoyed. Funny olde (2nd) worlde, eh.
"The CFR is essentially a set of rules that force banks to raise more funding domestically from regular mum-and-dad investors and through longer-term bonds.".......Posted by Bernard
http://www.interest.co.nz/news/anzs-fagg-says-higher-rbnz-funding-ratio-will-hit-customers
The comment in the above report is I believe from Gareth.
"The CFR requires banks to source 65% of their funding from either retail deposits or long-term wholesale funding with maturities of more than one year. The central bank aims to lift the CFR to 75% by mid-2012".
Now maybe I'm a tad thick but the two are quite different. Bernard's comment has the term "domestically" inside it.....where as the comment above in the report does not...a whole new meaning to what the CFR is all about.
Why the difference?
From the relevant RB paper, 'The Reserve Bank's New Liquidity Policy for Banks', top of page 12, CFR is defined:
"One-year core funding dollar amount =
all funding with residual maturity longer than one year, including subordinated debt and related
party funding
plus 50 per cent of any tradable debt securities issued by the bank with original maturity of at least two years,
and residual maturity (at the reporting date) between six months and one year
plus “non-market funding” that can be withdrawn at sight or with residual maturity up to one year, where
the percentage to be included decreases with size band (see Figure 6)
plus Tier 1 capital
One-year core funding ratio = 100 x (One-year core funding dollar amount / total loans and advances)"
So called "non-market funding" essentially means onshore deposits.
So what's the problem?
I think the issuing of covered bonds is a disgrace. If this is the way that this Govt thinks NZ can recover from the GFC then they have really hit the bottom of the barrel. The issue of covered bonds undermines the safety of local depositers funds. There is nowhere else we can put our money except in the Bank and now that is not even safe.
Might go and buy some more real estate!!
I read in the Herald this Sunday morn the following from Bernard: "...That should include domestic procurement policies for governments and state-owned enterprises, the use of currency intervention and the use of banking rules such as the Core Funding Ratio to discourage foreign borrowing."
The effort being aimed at preventing the flood of freshly minted foreign toilet paper money heading down here to pay for land etc and buggering the Kiwi in the process. All very well and good...BUT....the Core Funding Ratio process is being messed around with by the RBNZ for the benefit of the banks...in that the banks are now allowed to raise the CFR capital not just from domestic savings (peasant money) but from the sale of "covered bonds" to foreign entities (read foreign banks loaded with cheap QE shite straight from the Fed or BoE , BoJ or ECB.)
The BNZ, a 90s failed bank, has already dipped into this flood of almost free loot. They all have the govt dancing on a string...they will receive the laws that give them the guarantees which will make the loot even cheaper..."all the better for eating the little Kiwi peasants my dear".
And so while the media print fluff about the CFR being sound policy that will lead to better control over greedy bankers, the truth is quite the opposite. The "covered bond" loopholes being torn open by the RBNZ and the govt, will mean the banks get to entice yet more Kiwi peasants into the mortgage traps on price bloated property..thereby making sure their private cash machine 'the great Kiwi property ponzi scheme' rolls onward to fatter profits and gargantuan bonuses for the bosses.
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