Radio New Zealand - Te Reo Irirangi o Aotearoa

Coming soon to a bank near you: covered bonds

Updated at 2:13 pm on 8 June 2010

A banking lecturer expects more banks to use covered bonds to raise cash on the money markets.

The bonds raise money against a pool of mortgages that are ring-fenced from other assets on the bank's balance sheet.

A $3 billion covered bond issue confirmed last week by the BNZ will be the first by a New Zealand bank.

Massey University banking lecturer David Tripe says the bonds will help banks meet new Reserve Bank rules requiring 70% of their funding to come from local deposits and wholesale funding of a year or longer by next year, and 75% in 2012.

Covered bonds are banned in Australia because they favour one set of depositors over another in the event of a bank failure, but are widely used in Europe.

Greater stability foreseen

Dr Tripe says indications are that a limit of 5% will be placed on banks' covered bond programmes.

Deloitte financial services partner Richard Kirkland does not know if banks will push for an upper limit of more than 5% but says he believes more will use the technique - which, he argues, will actually increase banks' stability.

The Reserve Bank is due to begin consultation with the banks later this year.

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