The central bank has proposed a new bond market which will allow banks to sell-off mortgage-backed securities, shares in huge packages of New Zealand home loans. Mortgage-backed securities allow banks to offload underlying debt from their mortgage books to investors.

Historically, unlike many nations, New Zealand banks have kept mortgage debt on their balance sheets. The debt amounts to about $23 billion of loans, and is held in internal residential mortgage-backed securities. The move would allow the internally-held securities to be traded on the open market, rather than being held as collateral for the Reserve Bank. 

The Reserve Bank's consultation marks the second phase of a review launched back in November last year.  It could unleash a $20 billion plus mortgage-backed securities market for fund managers and institutions to trade.

A mortgage-backed securities market would allow banks to reduce risk and reduce reliance on funding markets. The move would have a significant impact on domestic fixed income offering new opportunities for fund managers.  

RBNZ said it believes a mortgage-backed securities market would reduce contingency risks for RBNZ as the bank of last resort, and increase the number of high-quality liquid assets in the market. It believes an established securities market would make the banking system more robust. 

RBNZ said it expects to issue final decisions in March 2019. The securities market could comment from June 2019. A five-year transition to full implementation is proposed. The RBNZ consultation closes on Friday 22 February 2019.