German Covered Bonds: Overview and Risk Analysis of by Ralf Werner, Manuela Spangler

By Ralf Werner, Manuela Spangler

The Pfandbrief, a more often than not triple-A rated German financial institution debenture, has turn into the blueprint of many coated bond versions in Europe and past. The Pfandbrief is collateralized by way of long term resources corresponding to estate mortgages or public region loans as stipulated within the Pfandbrief Act.

With a historical past that is going again to the 18th century and a excessive industry proportion in today’s coated bond markets, the German Pfandbrief is the main demonstrated coated bond. till this present day, no unmarried Pfandbrief has ever defaulted.

Even notwithstanding Pfandbriefe have survived the monetary hindrance comparably unhurt, traders became extra delicate concerning the creditworthiness of the corresponding provider and sovereign, the energy of the criminal (or contractual) framework and the standard of the canopy pool serving as collateral.

This monograph presents a based in-depth research of the criminal framework and the dangers inherent in a Pfandbrief, making an allowance for fresh marketplace advancements. ranging from the criminal framework, the German Pfandbrief is brought with out requiring previous wisdom. lined bond comparable dangers are defined intimately and their relevance to the Pfandbrief is carefully mentioned with specialise in the 2 commonest Pfandbrief kinds, personal loan and public Pfandbriefe. as well as that, the monograph comes with an in depth choice of Pfandbrief-related literature and a thesaurus explaining the most technical terms.

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Extra resources for German Covered Bonds: Overview and Risk Analysis of Pfandbriefe

Sample text

E. for the remaining creditors (such as senior unsecured creditors). Asset encumbrance does, however, not only relate to covered bonds, but also to central bank funding, derivative transac28 The cover pool monitor who gives his consent to a deregistration of assets makes sure that the mandatory overcollateralization is not undercut. 36 German Covered Bonds tions, other types of secured funding and securitization, and needs to be considered on an overall level. In the context of covered bonds, it is aggravated by the increasing overcollateralization requirements from rating agencies (Volk and Will 2012).

Pfandbriefe offer very favourable funding conditions as compared to other covered bonds. According to DG Hyp (2012) this is due to the Pfandbrief’s loyal and broad investor base and the faith in the product, but also due to the limited Pfandbrief supply caused by reduced issuance activities. Pfandbriefe still offer an attractive yield pickup versus German government bonds, see Fig. 18b. According to Wolf (2012), this yield pickup of covered bonds versus sovereign debt is currently bigger and less volatile than in other jurisdictions and, therefore, highly appreciated by investors.

Counterparty (credit) risk is especially relevant when there are high counterparty concentrations, when the derivative counterparties are somehow related to the Pfandbrief issuer or when there is a high default correlation between both. The PfandBG limits the derivative exposure to 12 % on a net present value basis. When this limit is reached, the Pfandbrief issuer can increase the overcollateralization or reduce the claims/liabilities due under the derivative contracts in the cover pool. There is also the 2 % excess cover that provides some additional buffer.

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