Parker David: Reserve Bank of New Zealand (Covered Bonds) Amendment Bill — First Reading 
Text is incorporated into the Bound Volume 
Parker David: Reserve Bank of New Zealand (Covered Bonds) Amendment Bill — First Reading 
[Sitting date: 22 May 2012. Volume:680;Page:2260. Text is incorporated into the Bound Volume.] 
Hon DAVID PARKER (Labour) 
: 
 Can I thank the Associate Minister of Finance Steven Joyce for his contribution and also the officials from the Reserve Bank who have briefed other parties including the Labour Party. They were fulsome in their briefings and answered all of the questions we could think of to ask at the time. The Labour Party will be supporting the first reading of the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill and its referral to the Finance and Expenditure Committee. We recognise that the issue of covered bonds has become normal internationally. 
I think the Minister put the issue quite properly when he said that there is effectively a trade-off here between obtaining long-term sources of funds that can be cheaper and also longer in the term of lending to the New Zealand bank—and that is a good thing—and on the other hand the tension in that the creditor who has recourse through these special purpose vehicles to a group of securities held by the bank through a special purpose vehicle is effectively getting a secured interest in those particular assets that ranks ahead of unsecured depositors in the bank. In practical terms what that means is that the largely overseas lender lending to a New Zealand bank through a special purpose vehicle using covered bonds will have a preferential position in the queue should the bank go bust to the detriment of unsecured deposit holders. The trade-off that is to the benefit of the unsecured deposit holder in New Zealand is that it is less likely that the bank will go bung because it has access to covered bond markets that are deep in liquidity and cheaper in cost. The balance between those two objectives is sought to be achieved by this bill’s setting up a regulatory regime and putting a limit on the amount that can be issued by way of covered bonds which have this preferential security status compared with unsecured depositors. 
We were given advice by the Reserve Bank both in its briefing to us as a party and also in the financial stability hearing pursuant to which the Governor of the Reserve Bank was before the Finance and Expenditure Committee and the advice that we had on both of those occasions was that currently before this practice of covered bonds became more widespread there was very little secured lending to banks. Close to all lending was unsecured which would mean that on a bank going bust everyone had a scrap but everyone effectively had a pro rata right to a share of the asset and no significant secured creditors would have a right of access to the bank’s assets upon liquidation in preference to unsecured creditors. So this is a significant change in recent years. The New Zealand banks are starting to dip their toe in the water when it comes to obtaining long-term funding through covered bond markets overseas. 
There are a couple of other points I would like to make. One is that one of the reasons why this might be more important to New Zealand banks than to certain other overseas banks is that sadly in New Zealand over the last three decades we have witnessed a decrease in the proportion of our financial institutions that are both owned in New Zealand and actually financed in New Zealand. We have run a current account deficit for so long in New Zealand that we have lost ownership of a lot of our financial sector and that points to some fundamental problems in the New Zealand economy that this bill is not going to fix but that make this bill more necessary until they are fixed. The truth of the matter is that New Zealand has run a current account deficit for four decades. The level of that current account deficit has been more than additional capital investment in New Zealand. It has actually paid for consumption. And the current account deficit that we have when the value of our exports is not enough to cover the cost of our imports and our interest bill is every year paid for by a combination of selling New Zealand assets that were previously New Zealand - owned to foreign buyers and borrowing more money from overseas. Those are the two ways that normally a current account deficit is financed. And now that we have done that for four decades— 
Paul Goldsmith 
: Growth in the value of assets. 
Hon DAVID PARKER 
: Growth—sorry? 
Paul Goldsmith 
: The value of the assets as well. 
Hon DAVID PARKER 
: Well you can develop that point but essentially when we have a current account deficit and we are not covering the cost of our imports and exports then we have a problem. I do not think there really are many people who would disagree with that. You know New Zealand now has one of the highest rates of net international liability in the world. Indeed the countries that are as bad as us are a short list and they are actually not good company. They are Iceland Hungary Ireland Greece and Portugal. I think they are the only countries that have a worse net international liability position than New Zealand. That makes us very reliant on foreign credit lines into our banks and makes us vulnerable to credit squeezes in a way that we would not be if we had greater pools of savings in New Zealand rather than being reliant on overseas loans to New Zealand and overseas ownership of New Zealand assets. 
That background is something that should be highlighted here because it is that level of international indebtedness—our net international liabilities to the rest of the world—that makes New Zealand banks more reliant on overseas credit lines and therefore more likely to be needing to access these longer-term deposits from overseas investors into New Zealand who will have the advantage of these covered bonds which have some benefits to the New Zealand banking system and therefore also to unsecured depositors of New Zealand banks. 
I think for me one of the issues that we will be looking at at the Finance and Expenditure Committee from the Labour side is whether the limit on the amount that can be secured by a bank ahead of unsecured creditors should be set out in the statute or whether it should be left to Reserve Bank guidance. I do not know the answer to that offhand. I am sure we will get advice from the Reserve Bank. I am not sure which other officials will be advising that committee. But I do wonder whether there should be some statutory limit on the amount that can be the subject of these covered bonds which rank ahead of unsecured creditors. That is one of the issues that we can discuss at the select committee. 
But the more important issue for me is that we must take steps in New Zealand to redress this imbalance that we have in our economy where we do not earn enough from our exports to pay for our imports and interest. We must address it through improvements to our savings; through some improvements to our tax system to encourage export growth rather than growth of the speculative parts of our economy as well as some other measures like a research and development tax credit; and through addressing some of the fiscal pressures that are coming at us through the ageing population and some of the unrealistic settings that we have around our age of entitlement to superannuation. 
Those are some of the big issues that need to be tackled by the Government. Only Governments can change those measures just like only Governments can put in place this measure effectively. Businesses cannot do it for themselves and it is incumbent upon this Parliament to actually look at what is the cause of the loss of ownership of our financial sector over the last two or three decades. It is now largely Australian-owned. It is no coincidence that they have got better savings and a better tax system. They tax capital gains and remove the tax bias that favours speculative investment and as a consequence— 
Paul Goldsmith 
: Try and buy a property in Sydney. 
Hon DAVID PARKER 
: I beg your pardon? 
Paul Goldsmith 
: Try and buy a property in Sydney. 
Hon DAVID PARKER 
: I am not saying that property prices do not go up; no one suggested that Mr Goldsmith. But there is no doubt that the net international liability position of Australia is better than the net international liability position of New Zealand. 
Andrew Little 
: $1 trillion in industry savings. 
Hon DAVID PARKER 
: A trillion dollars in industry savings is the figure that my colleague tells me. That makes a difference. 
In closing the Labour Party supports this bill going to the select committee but we are interested as to whether the appropriate limit on these covered bonds is 10 percent and whether it should be enshrined in statute.