The Pfandbrief is key to Germany as a financial centre

The special safety and impeccable credit history of the Pfandbrief remain inseparably linked with its reputation among investors and its importance to Germany as a financial center. After the market for public-sector bonds the Pfandbrief market is Germany’s second-largest market for fixed-income securities, with close to EUR 850 billion.

Its market volume and its crisis-remoteness make the Pfandbrief an important element of Germany as a financial centre. For this reason, it is in the common interest of the entire banking industry as well as of the bank supervisory authority and policymakers that the Pfandbrief should not be jeopardized.

“I believe in the German Pfandbrief market.”
Jochen Sanio, President German Federal Financial Services Supervisory Authority in an address at the Club of international business correspondents, Frankfurt/Main, September 2006

Cover Assets
Not all the loans a Pfandbrief bank grants are eligible as cover for a Pfandbrief. The Pfandbrief Act expressly specifies which loans meet the criteria to qualify as cover assets for Public, Mortgage and Ship Pfandbriefe. The cover assets in their entirety for each Pfandbrief category are referred to as a cover pool.

Public Pfandbriefe
Claims on the public sector as debtor are eligible as cover assets for Public Pfandbriefe. The Pfandbrief Act stipulates precisely which borrowers in Germany and abroad qualify.

Pfandbrief creditors enjoy preferential right in the event of insolvencyThe safeguarding mechanisms of the Pfandbrief Act are brought into play through the Pfandbrief creditors’ preferential right in the event of insolvency. This means that in the event of a Pfandbrief bank becoming insolvent, the cover pools (collateral) are made available only to the Pfandbrief creditors to satisfy their claims. Thus, they are not affected by the insolvency of the Pfandbrief bank.

Investor Protection - Net present value cover
The cover pools secure the Pfandbrief investors’ claims to payment. The Pfandbrief Act stipulates that the nominal and the net present value of Pfandbriefe outstanding must at all times be covered by corresponding assets in the cover pools. The details of determining the net present value, which also includes stress tests, are set forth in the net present value regulation.

Legally prescribed overcollateralization
Moreover, the Pfandbrief bank must maintain excess cover of at least 2% of the nominal and the net present value of the Pfandbriefe outstanding. The overcollateralization is intended to cover administrative expenses and to meet liquidity management costs in the event of the bank’s insolvency. Pfandbrief banks often voluntarily hold far greater excess cover than that prescribed by law.

Cover pool monitor
The Federal Financial Supervisory Authority (BaFin) appoints one or more independent cover pool monitors for each Pfandbrief bank. It is the cover pool monitor’s job to ensure that the mandatory cover for the Pfandbriefe exists. Not answerable to the bank, the cover pool monitor performs a function that is shaped solely by the Pfandbrief Act.

Differences between Jumbo, bearer and registered Pfandbriefe

The Pfandbrief market is made up of registered Pfandbriefe, traditional bearer Pfandbriefe, and Jumbo bearer Pfandbriefe, with each segment accounting for about one third. Registered and bearer Pfandbriefe differ in regard to their transferability. The bearer Pfandbrief may be transferred at any time by way of a simple purchase transaction.

By contrast, the registered Pfandbrief has to be assigned to the new buyer and the issuer notified accordingly. For this reason, registered Pfandbriefe are bought primarily by long term-oriented institutional investors such as insurance companies and pension funds, which keep the Pfandbriefe in their portfolio until maturity. In the case of the bearer Pfandbriefe, on the other hand, the big-volume Jumbo Pfandbriefe in particular (minimum issuing volume EUR 1 billion) are regarded as being especially liquid. This is because large investment banks pledge to quote buying and selling prices at all times in especially tight bid-ask spreads. These Jumbo-format issues are aimed more at transaction-oriented investors and at very conservative investors in and beyond Europe, notably central banks.

All information are based on the leaflet “The Pfandbrief – a save investment” published by the German Pfandbrief Association. Please visit the website of the German Pfandbief Association.