NZGBS: Westpac: HQLA Proposal, Potentially A Fresh Source Of Support

Westpac write “the RBNZ’s Liquidity Policy Review is expected to result in changes in NZ banks’ liquid assert portfolios, potentially requiring them to hold more NZGBs than at present. The review was started in February 2022, with the latest consultation document released in February 2023. There will be two further documents, and a finalised proposal is expected in 2024, with regulations expected to take effect in late 2025 or early 2026.”

• “In short, the RBNZ believes most bond types currently held as liquid assets would not be liquid in a stress event. ESAS balances and NZGBs are the primary instruments which would remain eligible. Kauris and LGFAs are a possibility. The RBMS, currently the second largest liquid asset holding, was noted as one example of an instrument which the RBNZ believes should be ineligible under the new regime.”
• “Should this prove to be the case, then the $30bn of RMBS’ currently held would need to be replaced with, all else equal, NZGBs. But there are only around $96bn NZGBs (ex-LSAP) outstanding, of which over half is held by non-residents.”
• “Consultations are still in the early stages, but it appears at first blush that NZGB swap spreads are likely to benefit from this regime change.”