A former academic says a new method of funding mortgages should be banned or have bigger restrictions placed on its use.
Former Victoria University economics lecturer Geoff Bertram appeared before MPs considering legislation which will regulate the use of covered bonds.
The bonds allow banks to raise cheap funding by using top-quality mortgage assets as collateral to borrow from big foreign financial institutions.
Dr Bertram says they will also put everyday New Zealanders with deposits at the back of the queue for getting their money back in the event of a bank liquidation.
He says when a bank fails, the assets on its books provide the means of paying out all or some of the claims of the bank's creditors.
Dr Betram says in this process seniority is the key and some creditors hold prior claims which get first place in the queue for repayment as assets are liquidated, leaving less secured and unsecured creditors further down the queue.
He says covered bonds are designed to put the holders at the front of the queue.
"The assets placed into covered pools are not to be available at all to meet claims from unsecured creditors, unless and until the covered bond holders have been fully reimbursed. Liquidators will be legally barred from accessing those assets if this bill is passed", he says.
Dr Betram says he believes this is unacceptable and covered bonds should be banned not given statutory protection.
He says if a ban is not imposed, at the very least they should be restricted to just 4% of individual banks' funding, down from the 10% currently proposed.
Representatives of the big four banks, plus Kiwibank, told MPs the bonds were a useful means of diversifying their mortgage funding.