Norman Russel: Reserve Bank of New Zealand (Covered Bonds) Amendment Bill — First Reading 
Text is incorporated into the Bound Volume 
Norman Russel: Reserve Bank of New Zealand (Covered Bonds) Amendment Bill — First Reading 
[Sitting date: 22 May 2012. Volume:680;Page:2264. Text is incorporated into the Bound Volume.] 
Dr RUSSEL NORMAN (Co-Leader—Green) 
: 
 I rise to speak on behalf of the Green Party on the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill. This bill establishes a legislative framework for the orderly development of a new debt market in covered bonds. Covered bonds are a type of mortgage-backed security with one significant difference and that is that the investor has a secured recourse to a pool of assets which is essentially a bunch of mortgages. That is the fundamental difference about covered bonds. If this bill makes its way through what it will do is this. The issuing bank would need to be registered in New Zealand. There would be oversight of covered bonds by a private third party—and the fact it is a private third party is significant—and clarification of the insolvency law should one of these special purpose vehicles actually fail. There would be—and I think this is quite important—a covered bond limit of 10 percent on the issuing bank’s asset base. So this is the fundamental of what has been established.  
One way to look at the development of covered bonds is that it maintains the flow of credit to New Zealand. It facilitates effectively what has become our national addiction to credit. So in that sense you could view it as part of the problem in that it is facilitating access to that credit. On the other hand this is where we are: we are running very large current account deficits. So we need to make sure that in order to maintain the stability of the financial system we allow access to this credit but that we also regulate it. Effectively what this bill does is provide a legislative framework for the regulation of this form of credit into New Zealand through the banks.  
As such because it does provide a form of regulation to covered bonds it should add to the resiliency of our banking sector. For that reason the Green Party supports it even though we have concerns. We were very thankful to the Reserve Bank for providing a briefing to us on the covered bond bill and we support the proactive stance of the Reserve Bank which is trying to provide some kind of legislative certainty around what is for New Zealand a relative new debt instrument. Of course this is not a new instrument from a European perspective; it is a very old instrument and it has been used successfully for many years. But from a New Zealand perspective this is a new kind of debt instrument.  
A significant flaw in the legislation which we really do have concerns about and want to discuss at the select committee is the reliance on market-based oversight of this market. Under this bill oversight of the market in covered bonds essentially is provided by private sector oversight. That means that rather than the Reserve Bank itself providing the oversight it is effectively in private hands. Covered bonds are not the kinds of mortgage-backed securities that lay at the heart of the global financial crisis. They are not exactly the same things as those kinds of mortgage-based securities but they do have many similarities. They do have significant similarities to the mortgage-backed securities that lay at the heart of the global financial crisis and for that reason we think there needs to be good oversight of these covered bonds.  
When you think about it if they do go up to 10 percent of the issuing bank’s assets we could be looking at a market of about $33 billion or so which is a significant market by New Zealand standards. The danger is that we create a market or a debt instrument that becomes too big to fail. And once we create an instrument that is too big to fail the danger is that the Government effectively has to end up bailing it out if we run into problems. We saw this of course with South Canterbury Finance where the Government ended up having to bail it out. But that is what happens when you have these kinds of debt markets or debt instruments that become so large the Government had no choice because it was too big to fail but to bail it out. We saw that with Treasury’s administration of the retail deposit guarantee scheme. One of the critiques of the Auditor-General in the way that Treasury administered the retail deposit guarantee scheme was that it failed to regulate it properly with the result—[ 
Interruption 
]  
The ASSISTANT SPEAKER (Lindsay Tisch) 
: Order! I am sorry to interrupt the member. The cross-banter that is going on has got nothing to do with the debate. Keep it down. I would like to hear the member. 
Dr RUSSEL NORMAN 
: Thank you Mr Speaker. The issue with South Canterbury Finance and the retail deposit guarantee scheme was that effectively Treasury failed to monitor the scheme properly with the result that there was a cost to the Crown—maybe a couple of hundred million dollars on top of what it should have been. And the risk with the covered bonds the way this is being constructed by the Reserve Bank is that we may find ourselves in the same situation where we have developed a market that is too big to fail and effectively the Government has to step in. For that reason we think that it is important that there is independent Reserve Bank monitoring of this new instrument—these covered bonds—rather than simply relying on a market-based oversight or a private sector oversight which is the way that the model is currently being proposed.  
We know that in the consultation on this bill the trading banks had no appetite for Reserve Bank monitoring. Well I am sure they did not and that does not surprise me one little bit. However that does not mean that the New Zealand Government should not have an appetite for independent oversight of the covered bond market. And the reason we should have an appetite for it is that it could be us that end up picking up the bill if something goes horribly wrong with the covered bond market and it becomes a very very large and very expensive problem for the New Zealand Government as has happened previously.  
One of the lessons we believe of the global financial crisis is that market resilience is just as important as market efficiency. So although it is true that having more intensive regulation of this particular debt market may reduce some of the efficiency of the market by increasing some of the overhead costs in terms of administration which is entirely possible it might be that the trade-off in terms of having market resilience—making sure that we do not create a debt market that then becomes so big that the Government has no option but to step in to save it if it runs into trouble—may well be worth any extra minor administration costs that come with having better oversight of the market hence reducing its efficiency marginally. I would rather that we had a marginal decrease in the efficiency of this market by having better oversight but ensuring that we have greater resilience in the market given that at the end of the day given the size of the thing it probably will be the New Zealand Government that has to pick up the pieces if anything goes horribly wrong. We will be voting for this legislation. We look forward to the select committee debate. We thank the Reserve Bank for the briefing.