Plea to RBNZ on bonds

Reserve Bank Governor Allan Bollard. Photo / Mark Mitchell

Credit rating firm Fitch Ratings is calling on the Reserve Bank of New Zealand (RBNZ) to help raise standards for covered bonds globally by setting a good example in the New Zealand market.

The RBNZ is currently developing regulations for covered bonds and a consultation paper suggests that New Zealand covered bonds should be registered but there will be no ongoing supervision beyond the supervision of the banks themselves.

Last week BNZ become the first New Zealand bank to sell covered bonds in Europe after it earlier sold NZ dollar denominated covered bonds.

Covered bonds are controversial because they have recourse to a pool of assets that secures or "covers" the bonds. They are not allowed in Australia, where the law requires banks to place depositors above all other creditors in their claims on assets.

Fitch said the RBNZ has the opportunity to raise the standard of data transparency and periodic reporting compared with some of the established covered bond markets.

"Fitch believes the level of disclosure and the frequency of information related to both the issued covered bonds and the securing cover assets could be improved globally," said Helene Heberlein, managing director and head of Fitch Ratings' covered bond group.

"The increased transparency would be welcomed by all market participants and a regulated uniform definition of data to be reported would enhance consistency and facilitate comparison between all programmes in a given country," she said.

Apart from the pre-emptive role of the oversight, Fitch raised the issues of liquidity gaps and alternative management when an issuer defaults.

Fitch sees a role for regulation to ensure prompt and professional management of the cover pool and privileged creditors following the default of a financial institution but said the consultation paper does not mention any such involvement of the banking authorities.

For existing New Zealand covered bonds, the replacement of the issuer is governed by agreements that divide the responsibility between different parties. This provides less comfort than programmes where the alternative manager is a single party appointed by and reporting to the financial regulator.

The RBNZ is seeking feedback on its proposed 10 per cent maximum limit, which would cap the cover pool in proportion of the bank's total assets.

- NZPA