The Government has moved to provide a new legal framework for the issuance of covered bonds by New Zealand-registered banks.

The Reserve Bank of NZ (Covered Bonds) Amendment Bill, introduced to Parliament yesterday, provides for the central bank to maintain a register of banks' covered bond programmes, which the Government said would allow greater legal certainty for covered bond investors if a bank defaults.

Covered bonds are debt securities where the bond holder is an unsecured creditor of the issuing bank, but holds a secured interest in a separate pool of assets - mortgages - called the "cover pool".

They have been common in Europe for many years. New Zealand banks started tapping into the covered bond market about two years ago but until last year they were illegal in Australia.


The potential risk for other investors is that the assets available to covered bond owners may not be available to other creditors in the case of a liquidation.

Covered bonds have been controversial because bond holders rank higher than depositors in the event of a bank failure.

Finance Minister Bill English said covered bonds allowed banks to diversify their funding by providing access to new investors.

English said the covered bond register would offer greater clarity for investors and depositors.

He said the new framework will come into effect this year, with a transition period to enable the registration of existing covered bonds programmes.

In 2010, the Reserve Bank put an upper limit on the amount of covered bonds issued by locally incorporated banks to a maximum of 10 per cent of the total assets of the issuing bank.