Clark David: Reserve Bank of New Zealand (Covered Bonds) Amendment Bill — First Reading 
Text is incorporated into the Bound Volume 
Clark David: Reserve Bank of New Zealand (Covered Bonds) Amendment Bill — First Reading 
[Sitting date: 22 May 2012. Volume:680;Page:2273. Text is incorporated into the Bound Volume.] 
Dr DAVID CLARK (Labour—Dunedin North) 
: 
 I rise to speak to this bill the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill and Labour will support its referral to the select committee. We recognise the importance of having legislation in this area. It is an area that as previous speakers have mentioned banks have already dabbled in in this country. These bonds exist in New Zealand but they lack a regulatory framework.  
One of the debates that no doubt will happen when this bill gets through to the select committee as I imagine it will is the appropriate percentage that New Zealand sets for its regulatory framework. We have heard from the experts questioned at the select committee that different rates exist around the world according to perceived needs. Canada for example has a 4 percent rate for covered bonds. We can imagine the arguments that might be put in favour of having a low amount set in our economy and they might be to ensure that those other investors who participate in the sector are not put at the bottom of the heap at the expense of the big investors who rush in to take advantage of the covered bonds that put them at the front of the queue. We will look forward very much to hearing in the select committee from submitters who represent the unsecured interests that will be jilted down the queue as a result of this legislation proceeding should it proceed from the select committee through the House. There have been $6 billion worth of bonds issued over 2 years without any regulatory oversight. That is why Labour recognises this as an area that clearly needs to be addressed.  
The bill has been through two consultation processes with broad acceptance of the proposed legislation by most banks and bondholders. So we anticipate that the actual concept itself will most likely survive unless there are any issues raised that have not been raised in other jurisdictions or that specifically apply to New Zealand in the case of these bonds.  
During the select committee process recently in relation to the  
Financial Stability Report 
 I had the opportunity to ask the Reserve Bank governor some questions about this issue and his offsider related that the proposal of having a 10 percent level in New Zealand is indeed very similar to that which Australia currently has at 8 percent. So it seems a good starting point for a discussion. The question really in my mind should be: is that too high is that adequate or should it be brought down similar to the Canadian example that I cited earlier?  
I asked the question in that select committee about the effect on unsecured creditors—those who have already invested in similar investments and who may be affected by a subsequent issue of covered bonds. Those investors are the ones whom we certainly in the Labour Party will be concerned about in the progression of this legislation because we can be pretty confident that those institutional investors who are pushing for this covered bond market and the banks that supply them will make sure that their interests are looked after. The Labour Party will want to make sure that those unsecured creditors further down the track are not disproportionately disadvantaged as a result of legislation that is designed to make sure the banking sector has desirable offerings.  
The answer that I got was what one might expect from an expert in the field. The answer was that the basis for the limit is the fact that the more secured funding a bank does the more that potentially dilutes the interest of the unsecured creditors. It is a fact. So the answer was that if you left banks to do what they wanted they would have that in mind and so they would not want to have too much secured borrowing. But to be on the safe side according to the Reserve Bank it is recommending a 10 percent limit.  
As I said we support the basic proposal. We look forward to hearing from submitters on the merits of the level and indeed whether there are any snags that we have not spotted. That is why the Labour Party will be pleased to support this bill’s referral to the select committee. Thank you.