Cunliffe David: Reserve Bank of New Zealand (Covered Bonds) Amendment Bill — First Reading 
Text is incorporated into the Bound Volume 
Cunliffe David: Reserve Bank of New Zealand (Covered Bonds) Amendment Bill — First Reading 
[Sitting date: 22 May 2012. Volume:680;Page:2263. Text is incorporated into the Bound Volume.] 
Hon DAVID CUNLIFFE (Labour—New Lynn) 
: 
 This bill the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill reminds me rather a lot of the Prostitution Reform Bill. 
Todd McClay 
: Tell us how David. 
Hon DAVID CUNLIFFE 
: I thought you might be interested and I am being quite serious here. It was probably the most difficult vote that I have cast in my 12 years here. The issue with this bill however is similar. There is a practice in the market place that many New Zealanders feel uncomfortable about. In this case it is covered bonds. Let us be clear about what a covered bond is. A covered bond is a vehicle by which large wealthy institutional investors get themselves to the top of the security queue and mum and dad investors go to the bottom because they do not participate in the special purpose vehicle that extends the guarantee to the big investor. This is a queue-jumping mechanism. 
David Bennett 
: That’s not true. 
Hon DAVID CUNLIFFE 
: It is absolutely true. And like prostitution the issue here is whether it is better to legalise it and regulate it because it exists or to pretend it does not exist. I might say that we have had quite an active debate within the Labour caucus about how we should handle this bill because as a starting point we are not enamoured of covered bonds. Covered bonds are not good for small investors at a time when we are trying to encourage mum and dad Kiwi to put their hard-earned savings if they can afford any into the banking system to build up national savings. We ought not to do anything that would undermine that. 
There is a counterargument and to be fair it is worth repeating it that covered bonds can extend the access of major banks to lower-cost offshore finance from large institutions that firstly might lower retail interest rates in New Zealand by passing on those lower costs which would be a good thing for borrowers or secondly might increase the margins of the bank which would be a good thing for the bank’s shareholders. But if the price of that is that mum and dad Kiwi face higher risk because they go to the bottom of the queue and their debt is overtaken by the security ranking of the guarantees to the special purpose vehicle then there is a potential equity issue. 
I want to compliment the official from the Reserve Bank of New Zealand—and I will name him Mr Ian Woolford—who has published the regulatory impact statement. In my view it is a very cogent and competent impact statement and it does set out the issues on both sides of the ledger here. What the bank notes is that the cover pool assets are sold to a separate legal entity which is the special purpose vehicle and it says in paragraph 8: “covered bonds do pose a risk to unsecured creditors. This risk arises as the assets to which covered bond holders have a priority right will not be available to unsecured creditors should a bank fail.” That is the key downside with this legislation. Then the question is if you are going to have legislation because you do not want unregulated covered bonds in the market and they are happening anyway which is the current parlous state of affairs in New Zealand then you had better regulate.  
The first question that arises is what the appropriate maximum level is. The Reserve Bank has looked at the publications of the ratings agencies which recommend around 10 percent as a cap so no bank could have more than 10 percent of its asset base in covered bonds. Yet we note that Australia has a lower level of 8 percent. We also note that the interests of the rating agencies will not be the same as the interests of the Crown if the Crown is here to defend the interests of mum and dad investors. One of the issues that Labour will be looking at when this bill is at the Finance and Expenditure Committee—we are supporting it as far as the select committee at this stage so we can hear the arguments—is whether that limit should be lower than 10 percent. It sure as heck should not be any higher. Should it be lower? What is wrong with 8 percent? What is wrong with 7.5 percent? What is wrong with 5 percent? We will be very interested to hear submissions on that issue.  
The second key issue is that if the justification for this legislation is to regulate covered bonds and to prevent their unregulated spread throughout the market what type of oversight should be provided? What type of regulation would be sufficient? I note that the regulatory impact statement deals with issues like asset segregation relating to whether there is a clean split between the special purpose vehicle and the other assets at the bank; the certainty of treatment in insolvency in section 2 of the regulatory impact statement; and the clarity around the powers of the asset pool monitor in section 3. I ask whether behind the monitoring of the asset pool the Reserve Bank or another regulatory agency will have sufficient reserve powers to hold the system accountable. 
Labour has not made up its mind yet whether it will support the bill beyond the select committee. That will depend on the nature and substance of the submissions and the advice that we receive but we will signal an interest in ensuring that the limit for covered bonds is set no higher than the workable minimum because we note right up front the trade-off with the interests of mum and dad investors. 
Secondly we will want to be absolutely sure that the three issues that the Reserve Bank has raised are sufficiently covered off and thirdly we will want to ensure that the Reserve Bank itself has sufficient reserve powers to make sure that the accountability in the chain is rigorous. If those conditions were met I imagine that our caucus could consider seeing its way clear to support the bill through on the grounds that we do not want an unregulated practice in the market but nor do we want sham regulations. We do not want the impression that we have cleaned up the Wild West but have a sheriff with no guns or with a popgun in the face of some of the largest most powerful institutions in the country. So that there is the argument. 
This is the first reading. We wish the bill well on its way to the select committee and we look forward to receiving submissions. I hope not just that those submissions will come from interested parties in the financial markets who have a pecuniary interest—that is they make money out of this—but that we also hear from the representatives of consumers and from savers because it is really important that the select committee gets the full picture. Thank you.