by Sophia Rodrigues
The limit of 10% is on the total assets of an issuing bank and is calculated on the value of assets that is collateralised against the issues.
The RBNZ had issued a consultation document in October where apart from proposing limits on covered bond issuance, it also proposed a regulatory framework to support such issuance. Announcement on the legislative support will follow later this year, the RBNZ said.
The move to issue a formal limit follows the keen interest that banks have displayed in issuing covered bonds. Bank of New Zealand first issued local covered bonds after the RBNZ indicated its comfort with such bonds back in May. It followed this with a EUR-denominated covered bond issue.
Westpac is the next to follow, announcing earlier this week its plans to issue EUR-denominated covered bonds for up to EUR1 billion. The bank has mandated four investment banks, including Westpac Institutional Bank for this purpose.
The comfort indicated by RBNZ in issuing covered bonds has finally prompted Australian to consider allowing such issuance in future. The government package of banking reforms announced in December said Australian banks, credit unions and building societies will soon be able to issue covered bonds.
While covered bonds give institutions access to cheaper source of financing, critics note that the best pool of mortgages are collateralised against such issuance as banks seek to get the highest AAA rating. This could potentially have a negative impact on a bank rating during a downturn as the risk associated with the remaining assets increases.
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