Parker David: Reserve Bank of New Zealand (Covered Bonds) Amendment Bill — Second Reading 
Text is incorporated into the Bound Volume 
Parker David: Reserve Bank of New Zealand (Covered Bonds) Amendment Bill — Second Reading 
[Sitting date: 14 February 2013. Volume:687;Page:7909. Text is incorporated into the Bound Volume.] 
Hon DAVID PARKER (Labour) 
: 
 I thank the Associate Minister of Finance for his contribution on the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill and for that lucid description of what covered bonds are and why the Government deems them necessary. The Labour Party wishes that we did not need covered bonds in New Zealand but it is wishful thinking to say that we do not need them. We have them and they are pretty hard to unwind at the moment particularly in the face of a current account deficit that means that New Zealanders are reliant on increasing lines of credit coming through the mainly Australian-owned banks via overseas lenders to those banks. Some of this credit these days is through these covered bond vehicles. I will come back to the issue of why the necessity for this is made worse by New Zealand’s current economic setting which may lead to a prolonged and entrenched current account deficit that is not going to be cured under current economic settings. 
As the Associate Minister has fairly acknowledged the effect of covered bonds is to create a class of lenders to banks who have a security over some of the assets of the bank namely some of the lending securities that the bank has. For example if the bank borrows money—they might be borrowing it from an overseas bank or from an overseas sovereign fund or from some group of bondholders overseas—and the bank then lends that money to New Zealand borrowers and it is a significant loan generally the bank has a form of security that is either a mortgage or a debenture. The security that that bank has is available to be used in the event that the New Zealand borrower does not repay what the bank has advanced to them. 
Until we had covered bonds in New Zealand all of those securities were available. In the event that a bank that had deposits from those overseas lenders as well as New Zealand depositors went belly up everyone was ranked equally. If the bank went belly up because it had got into financial difficulty and made some unwise loans then everyone stood in the same position. If there were not enough assets to go around when the bank went bung everyone took a haircut and everyone took the same haircut. What we are doing through this legislation is we are saying that there should be a class of lenders to banks who have a priority right to some of the assets of the banks. So some of those mortgages and debentures rather than being available to all depositors will effectually have a “gotcha” over them in respect of these international lenders who have lent through this covered bond market. 
Until the global financial crisis there were no covered bonds in the New Zealand market. There have been covered bonds particularly in Europe for a long time. Indeed in some of the European banks there are high levels of covered bonds meaning that a lot of the lending is matched with a “gotcha” over the securities of the bank. This means that the pool of assets that is available to people who are not in those covered bonds but are effectively unsecured depositors in the bank is smaller. All other things being equal if one of those banks goes belly up then the covered bond holders are effectively protected from getting much of a haircut and the other depositors wear the adverse consequences of that. The consequences of insolvency are concentrated upon them and they suffer more of a loss—they take more of a haircut. That is the effect of covered bonds. 
Dr David Clark 
: Some of us have more hair to lose than others. 
Hon DAVID PARKER 
: Thank you Dr Clark. The effect— 
Hon Clayton Cosgrove 
: That’s unparliamentary. 
Hon DAVID PARKER 
: No that was a compliment to me and insult to him—at least to those who are looking across at me rather than down from the top. 
So the effect of covered bonds is to change that arrangement and to change it dramatically. Following the global financial crisis when banks were hard-pressed to renew some of their credit lines the New Zealand banks found that they had to meet their obligation to repay some of their older borrowings and refinance them so that they could lend money out to the people they had loaned to in the New Zealand market. In order to do that they had to enter into the covered bond market. 
There has been a benefit to that in New Zealand because if it did not happen then it may have been the case—we will never know with certainty but it may have been the case—that those banks would not have been able to meet their obligations to the people who had lent them money either overseas or in New Zealand. Some of those banks could have been under pressure and that would have led either to a failure of the bank or to an increase in New Zealand interest rates—both of which could have been problematic for New Zealand. So I have no criticism of the banks actually in the face of what happened there. They having expanded credit in the earlier years into New Zealand I can see why they chose to pursue the covered bond market. 
Nevertheless there is something in the criticism from Emeritus Professor Geoff Bertram formerly from Victoria University an economist and others who are severely critical of the New Zealand regulator allowing these covered bonds to arise. The fact that they were not used in New Zealand did not mean that they could not be we found. Under the existing legislation it was possible for banks to issue covered bonds because there was no prohibition against them. So they did and then the Reserve Bank came along after it had happened and said: “Look we’re going to impose a limit on that through their banking licence or the conditions of their registration as a New Zealand bank.” 
 So reluctantly we have come to the view in the Labour Party that this is necessary. I would like to think it will not be necessary for ever and that one day when New Zealand is in a stronger economic position and our banks source even more of their funding from local sources we can revisit this and give New Zealand depositors equal priority over all of the assets of the bank rather than having part of those assets put out beyond their reach through the covered bond mechanism but at the moment it is necessary. 
I want to come to the question of the rate. There is a proposal that the limit be 10 percent of the bank’s assets at all times. The Australians have a rule where the limit is 8 percent of the bank’s assets as at the date of issuance. I personally would have preferred the Australian model. We have gone along with the Reserve Bank advice but I do not see why we are getting different rules in New Zealand compared with Australia. It is just adding levels of complexity at a time when CER is meant to mean we have similar rules across both sides of the Tasman. It is unlikely that if you had 8 percent at the time of issuance it would rise to more than 10 percent of the bank’s assets. For that to happen there would effectively have to be a 25 percent decrease in the size of the bank. If that is happening well there could be problems in that bank anyway. So I prefer the simplicity of the Australian model. 
I understand the Reserve Bank has its own reasons for the 10 percent model and we can go along with it because there is not a huge difference. Canada has a 4 percent limit and we thought about whether that was an appropriate limit. But the advice that we had from officials was that that was too low a limit for New Zealand because it meant that in respect of our smaller banking institutions the size of issuance that they could have into the covered bond market was so small that there would not be interest in the covered bond market. Internationally they are rather large tranches of money and 4 percent of some of our smaller banks like Kiwibank would mean that they were closed out of that market when their competitors—the big Australian banks—would be able to access that market. We do not want to create competitive disadvantage for smaller banks in New Zealand in respect of this because I personally do not want to prefer the interests of the bigger banks over the smaller banks and I am sure that is a view that might be held by others in this House as well. 
One issue where we do disagree quite strongly with the Government is that this limit should not be easily changed. We do not think this is something that should be delegated to the Reserve Bank and be within its discretion to change. We think the Reserve Bank should have to come to the Government and say: “Hey we think this should be changed.” There is a policy decision that then should be taken by the Government—not delegated now to the Reserve Bank—as to whether that should be the case. So we oppose discretion being given to the Reserve Bank to allow changes to that 10 percent level in the future without recourse to either the executive or Parliament. Indeed you could argue that that sort of thing is so serious that it should come to Parliament. But we thought well at least there should be some executive responsibility for a decision such as that rather than delegation to the Reserve Bank. 
I am just about out of time so I am going to say one more thing. That is that the greatest problem that this exemplifies is our current account deficit. Our current account deficit is funded only one way every year. It is from more borrowing from overseas most of it through the banking channel or asset sales to overseas owners. Every year we do that the balance sheet of our country continues to get worse. That problem was going to be cured by this Government; it was one of its promises. It said it was going to increase the percentage of exports as it rebalanced the economy towards the export economy. It has not done so. It has failed because it will not pull on levers like capital gains tax addressing monetary policy or compulsory universal KiwiSaver.