GOEBEL We are following the developments quite closely. According to the RBNZ’s second consultation paper, the Kauri market accounted for roughly 11 per cent of total primary liquid assets (TPLA) about a year ago. All Kauri issuers attract a sizeable, globally diversified investor base, which could very well pick up Kauri bonds in times of liquidity stress in the New Zealand banking sector. In my view, this adds excellent diversification to the composition of TPLA, which otherwise has a strong focus on domestic investors.

I understand domestic banks have made this point with the RBNZ during consultation, and hope and trust this will positively influence the ultimate outcome. Until then, the current preference for three-year maturities in the Kauri market will likely persist.

HELLERUP Nordic Investment Bank has been monitoring the developments in the RBNZ’s liquidity review and in fact we also responded to the consultation. The Kauri market has very much been domestic driven for NIB, and the bank treasuries are important. The review will take time and investors will need to invest before a potential new policy is implemented. We have good dialogue with all the major bank treasuries and their approaches are little different in the sense of how long they want to go on the Kauri curve. Nevertheless, we are very happy with the seven-year transaction we did in February, where we printed NZ$700 million (US$431.4 million).

DORE The Kauri market is very important to us and we monitor it closely. Anything that causes volatility affects the market and investors. When we were in New Zealand in March, investors told us they were concerned about the liquidity review because of the long period of time of not knowing what will happen and the uncertainty this creates. This was one of the factors that influenced our decision to offer a short-dated Kauri as our latest trade. Because of the uncertainty, investors are less inclined to go further out on the curve. Three years is a maturity that we had never accessed in this market before and was very well-received. It was also a positive in the sense that it was our second Kauri for the calendar year, following a NZ$550 million deal in mid-January. It was great to be able to return to the market relatively quickly and to issue such a significant trade.

BILL IFC [International Finance Corporation] has been looking at the review quite closely, and the cautiousness from issuers and investors is understandable. We have provided feedback to the RBNZ and we are hoping Kauri issuance will continue to be treated as a liquid asset. 

We appreciate the RBNZ’s emphasis on liquidity, but at the same time limiting supply and reducing the number and range of liquid assets on offer might negatively affect the very liquidity the RBNZ is seeking to promote. There is a fine balance between identifying and regulating illiquid assets, and not forming barriers to entry into the still developing New Zealand market – particularly for offshore issuers.

LAUTENSCHLÄGER I think the approach the RBNZ has taken is very understandable, the questions it is raising are very appropriate and the approach it has taken is definitely necessary. The New Zealand dollar market is relatively small and one always has to ask where liquidity will come from when the market is really in need – especially if there is a systemic risk.

To get non-domestic investors, the price concession issuers have to make is absolutely significant. Then, in a situation of liquidity stress, the banks can only get liquidity at a significant discount – which pushes them into a profitability crisis as well.

The banks are upset because they fear the current market for non-domestic issuers will disappear. However, while investment banks in New Zealand say Kauris are very liquid, they are not. This is something we have to admit. But it is not unique. Even in European government bonds, there are situations where there is no liquidity at all.

Only when we admit this will we find an appropriate solution. If the RBNZ provides an additional facility with different haircuts and charges, Kauris can still be part of the system – but at a level that reflects their much lower liquidity than New Zealand government bonds.

MORGAN We have been monitoring the liquidity review closely. We had the cha discuss developments with issuers and investors when we were in New Zealand earlier this year. The feedback we got from the market was that investors will remain cautious beyond 2026 maturities and I think this situation will remain until the review is finalised.

GOEBEL I would like to add an observation on a different regulatory issue. The RBNZ has also made technical changes to BPR 131, on standardised credit risk RWAs [risk-weighted assets] that will come into effect on 1 September. This includes a clarification that the effect of explicit guarantees on risk weights has to be derived from BPR 132. This was already the case, but it is still helpful and I have no doubt that Rentenbank’s sovereign guarantee meets the criteria for a zero per cent RWA.

There has also been another change, though, which I find rather unhelpful. It lists a selection of development banks issuing Kauris – including Rentenbank – which would be 20 per cent risk weighted under BPR 131. This is, however, not including the lowering impact of the guarantee under BPR 132.

LAUTENSCHLÄGER My personal hope is that the RBNZ will put in place a structure that still allows the Kauri to have a quasi-preferential treatment, though not the same as government bonds and different from what is currently accepted.

Bank books need diversification, so there will always be demand from the liquidity book side. When the new regime comes it might have a price impact, but after that all other components will take over and, over time, we won’t see any more impact.

On the other hand, if there is 100 per cent focus on New Zealand government bonds it will absolutely destroy liquidity in them because everybody will buy and hold. There has to be a balance and, ultimately, the bank books cannot ignore Kauris, from my point of view.

DORE For our Kauri transactions, bank treasury participation is usually 60-80 per cent and can be even be higher. It is a significant portion and if there is a reclassification of these triple-A rated bonds as the [RBNZ] proposal suggests, investors have told us it will negatively affect demand.

There will be an effect on flow, too. In recent years, we have been able to issue very liquid trades in this market. A few years ago, executing a Kauri of NZ$300 million or more was an achievement but more recently we have completed NZ$1.5 billion and NZ$1 billion trades. If we lose bank treasury participation, deals will become a lot smaller.

We are seeing more diversification in how Kauris are distributed, though. This was partially evident in our three-year Kauri. Although bank balance sheets were still most of the distribution, at 67 per cent, there was a good percentage of offshore official institutions and asset managers.

HELLERUP There is no doubt bank liquidity books are an important part of our Kauri deals. I think we would still be able to issue in the Kauri market without the bank treasury bid, but deal size would be smaller.

MORGAN Bank balance sheets are very important to the Kauri market. While historically they have made up a smaller amount of allocations in our bonds compared with some supranational issuers, there is no doubt as to their importance in building size and liquidity in the Kauri market.
I still believe the Kauri market would be a viable issuance option for us as we find interest from official institutions and real-money accounts in New Zealand. But the market would have to become more comfortable with smaller and less liquid lines.

GOEBEL There is regular offshore interest for Kauri bonds but it most likely cannot substitute the bank bid. It would also be anything but encouraging for other domestic investors if banks were not investing anymore.

BILL It is important not to hinder dealers or balance sheets in New Zealand from investing in SSA [supranational, sovereign and agency] paper even if the regulator deems some of this paper as not meeting liquidity thresholds. Limiting options for bank balance sheets would most certainly affect their portfolio diversification capabilities.