January 21, 2011 / 2:07 AM / 7 years ago

NZ central bank puts 10 pct limit on covered bond issuance

WELLINGTON, Jan 21 (Reuters) - New Zealand’s banks will be limited in issuing covered bonds to 10 percent of their total assets, the central bank said on Friday.

Local banks have started issuing covered bonds, securities backed by flows from mortgages but which remain on the issuer’s balance sheet, to diversify their funding sources and lower costs.

“An initial limit of 10 percent will allow banks to develop covered bond programmes, whilst providing a conservative ceiling on issuance in the short term,” said Reserve Bank of NZ deputy governor Grant Spencer.

The limit, which will be reviewed in two years, will be calculated on the value of the assets encumbered for the benefit of the bond holders.

Covered bonds are seen as safer than securitised mortgages since in the event of a default holders of covered bonds have a claim on the underlying assets as well as the bank itself, although some authorities, such as in Australia, have opposed because they rank ahead of depositors for payment if a bank fails.

The issuance of covered bonds is in its early stages in New Zealand, but they are used extensively in Europe to meet banks’ long-term funding needs.

The Bank of New Zealand launched the country’s first such bond last June as part of a planned NZ$3 billion programme. (Reporting by Gyles Beckford; editing by Balazs Koranyi)

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