No regulatory limit on RMBS in NZ

The Reserve Bank of New Zealand confirmed the 10 per cent regulatory limit on the assets encumbered for covered bond issuance, but said it doesn't plan to introduce a regulatory limit on residential mortgage-backed securities at this stage.

A limit on RMBS will be considered in the future if their use by banks changed materially, the RBNZ said.

The RBNZ said most of the replies it received in response to its consultation document on covered bonds said a limit on RMBS isn't necessary because they aren't used as a funding vehicle but as a source of reserve liquidity and existing RBNZ repo rules on RMBS limits how much banks hold.

On covered bonds, the RBNZ said it will review the 10 per cent limit on covered bond issuance after two years. This could be increased subject to the merits of an individual bank's funding case.

Banks with higher levels of non-performing loans could be subject to a lower limit.

Separately, the RBNZ said it will continue to work on the development of a regulatory framework for covered bond issuance, though there is nothing to stop New Zealand institutions from issuing covered bonds now.

Specifically, the RBNZ will seek to address concerns regarding a competitive disadvantage that New Zealand-owned banks currently face because the existing statutory management provisions make it difficult for them to create a covered bond structure.