The Reserve Bank has released a consultation paper on the introduction of a regulatory framework for the development of covered bond programmes by New Zealand banks.

At present, there is nothing in the Reserve Bank's prudential requirements or New Zealand law which prohibits or limits the issue of covered bonds. However, the Reserve Bank is of the view that some minor legislative changes would support the development of the covered bond market, which is already operating under informal guidelines.

Covered bonds are debt securities backed by the cash flows from a specific pool of mortgages or other loans. The development of a covered bond market for New Zealand banks could have benefits in terms of lowering the cost of long-term funding.

The Reserve Bank also intends to introduce new disclosure requirements to ensure that the impact of covered bond issuance is transparent. It will do this in the context of the wider bank disclosure review currently underway.

Submissions for the consultation paper close on 19 November 2010.

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