The Reserve Bank has kicked off the second consultation into a new standard for mortgage-backed bonds to improve confidence and liquidity in the New Zealand markets.
Deputy Governor Geoff Bascand said the new standard aims to reduce contingency risks for the Reserve Bank as a lender of last resort and provide issuers and investors with an additional funding and investment instrument.
The new Residental Mortgage Obligations Framework defines a “high-grade residential mortgage-backed securities standard” in order to address the shortage of high-quality liquid assets in the New Zealand markets, offer mortgage lenders an additional funding tool, and support the development of deeper private label mortgage bond markets, the RBNZ said.
“It will ultimately support the development of deeper capital markets,” said Bascand, who is responsible for financial stability at the bank.
The Reserve Bank is mandated to act as lender of last resort in times of market stress. When it lends to banks and other counter-parties it does so against “eligible collateral.” Residential mortgage loans largely represent the mortgage borrowing of New Zealand households. For the purpose of becoming eligible collateral, the financial claims from a portfolio of mortgage loans are incorporated into a mortgage bond.
In 2017 the central bank kicked off a review into the terms under which it is prepared to accept mortgage bonds as collateral and whether the standards underlying those bonds should be improved.
The first round of consultation took place in March and garnered 14 responses. The second round of consultation will close on Feb. 22 and the bank expects to issue final decisions in March and commence implementation from June 2019. A five-year transition to full implementation is proposed.