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Wednesday, December 4

New laws create stronger regulations for covered bonds and non-bank deposit takers

Parliament has passed one law to strengthen the regulatory regime for non-bank deposit takers and another to regulate covered bonds issued by banks.

The Non-bank Deposit Takers Act 2013 introduces a licensing regime for Non-bank Deposit Takers (NBDTs) – which include finance companies, building societies, and credit unions. The Act also gives the Reserve Bank new powers to detect and intervene should an NBDT become distressed or fail.

The Act substantially retains the existing prudential requirements covering credit ratings, governance, risk management, capital, related party exposures, and liquidity requirements. However, it introduces a licensing requirement for NBDTs, which includes the requirement for an NBDT to have suitable directors and senior officers.

The Act does not eliminate the risk of a NBDT failing. Rather, it aims to reduce this risk, and to prevent significant damage to the financial system if a failure occurs.  It will come into force by Order in Council, and the date for this is expected to be 1 May 2014. Existing NBDTs will then have 12 months to comply with licensing requirements.
The Reserve Bank of New Zealand (Covered Bonds) Amendment Act 2013 provides greater certainty and transparency for covered bonds issued by banks. The ability for banks to issue covered bonds helps improve financial stability by broadening banks’ funding base.

The Act provides for covered bond programmes to be registered and monitored by the Reserve Bank. It also provides legal certainty that if a bank fails, the covered bond holders will have access to the cover pool assets.

Covered bonds are a type of debt security where bondholders have a secured interest over a specific pool of assets set aside by the issuing bank, known as the cover pool. To protect the interests of other creditors, including depositors, the total size of the cover pool will be limited to 10 percent of a bank’s assets. The legislation received the Royal assent earlier this week and will come into effect on 10 December 2013.