Monday, June 17, 2013

Pfandbriefe in Germany - "Pfand + Brief = Quality"!

Last Friday, I visited the homepage of the association of German Pfandbrief Banks. The first thing I saw was the picture below. It actually leads you to a short film:

www.pfandbrief.de

In a stormy night, a professor is sitting about his paperwork and thinks about mathematical formulas. The dramatic music indicates that he is about to discover something fundamental! Besides a charwoman who is walking on the floor, he seems to be alone in the office building. As the Professor thinks about the equation “Pf + brief”, the charwomen enters the room. Abruptly, all paperwork falls from the table. Upon helping the Professor to range the papers, she looks at the board and, instantly, finds the solution: “= quality”.

What is the message? Let’s be a bit cynical: Pfandbriefe are so simple that even charwomen can understand them!

Pfandbrief

A Pfandbrief is a covered Bond. The idea is that you issue a bond and secure it by some form of collateral. The advantage of a Pfandbrief is that mandatory German Law governs the type and extent of collateral very thoroughly. This makes it simple for financiers to invest because it creates standardization and transparency which, ultimately, builds trust.

Issuing a Pfandbrief requires a special authorization for each underlying in question. Banks which have obtained such authorization are called “Pfandbriefbanken”.


Type of collateral

Depending on the underlying collateral, there are four types of Pfandbriefe:
 
  • Mortgage-backed bonds (“Hypothekenpfandbrief”)
  • Bonds backed by guarantees of (German, EU, and some other) public institutions (“Öffentlicher Pfandbrief”)
  • Vessel-mortgage-backed bonds (“Schiffspfandbrief”)
  • Aircraft-mortgage-backed bonds (“Flugzeugpfandbrief”)
 
For any of the above underlying, the German legislator strictly defines how to fix its value (“Beleihungswert”) and which maximum portion of the underlying is available for coverage (“Beleihungsgrenze”).

 
Coverage principle
 
Pfandbriefe are characterized by the coverage principle (“Deckungsprinzip”) which guarantees that the underlying is sufficient in terms of

  • nature of underlying;
  • quality of underlying;
  • insolvency remote character of the underlying;
  • liquidity cushion consisting of liquid and stress-resistant assets for the next 180 days.
 
In other words, the idea is to separate normal creditors of the bank from covered bond creditors, even and above all when the bank goes bankrupt.


Statistics
 
Among other main international covered bonds’ markets, Germany’s Pfandbrief market is important. In 2011, it represents 22 % of total outstanding volume and 11 % of new issues. The trend is, however, negative as its share is declining steadily since 2003 (71 % of total outstanding volume and 53 % of new issues in 2011)
 
You can find some data on
 
Ratings of German Pfandbriefe and Pfandbriefbanken