Reserve Bank consults on mortgage bond collateral standard
17 November 2017
Reserve Bank consults on new
mortgage bond collateral
The Reserve Bank today published a consultation paper proposing an enhanced mortgage bond standard aimed at supporting confidence and liquidity in the financial system.
This follows a review of domestic and international mortgage bond collateral standards.
When the Reserve Bank lends to banks and other counterparties it does so against ‘eligible collateral’ (usually lower risk financial assets). Mortgage Bonds are a key form of eligible collateral in many countries with the Reserve Bank first accepting them in response to the global financial crisis when its lending to the banking system increased significantly. In New Zealand mortgage bonds are not generally traded.
The Bank believes that a more standardised and transparent framework for mortgage bonds would improve their quality and make them more marketable. The Bank has developed a proposed new format for mortgage bonds, called Residential Mortgage Obligations (RMO).
The Bank believes the proposed new collateral standard would:
• improve the risk position of the Reserve Bank by promoting the use of higher quality and potentially more liquid, mortgage bonds as collateral in the Bank’s lending operations;
• support New Zealand market lenders by creating an additional funding instrument for residential mortgages; and
• promote a deeper capital market through the availability of simple, comparable and transparent mortgage bond instruments.
The proposed standard is consistent with international policy guidelines aimed at promoting simpler and safer secured bonds.
The Reserve Bank is seeking feedback on the terms under which it should accept mortgage bonds as collateral and the proposed new RMO standard.
The consultation closes at 5.00 pm on 16 February 2018.