Pfandbrief
Encyclopedia
The Pfandbrief a mostly triple-A rated
German bank
debenture
, has become the blueprint of many covered bond
models in Europe and beyond. The Pfandbrief is collateralized by long-term assets such as property mortgages or public sector loans as stipulated in the Pfandbrief Act. Total volume outstanding in Pfandbriefe was EUR 806 billion as at end-2008. Pfandbrief bonds make up the third largest segment of the German bond market after public sector bonds and unsecured bank debt.
in 1769, Pfandbrief-like securities have been introduced in more than 25 Europe
an countries – and in recent years also in the United States of America
and other countries outside Europe – each with their own unique law and regulations. Today, continental Europe's covered bond market is well established. Initially primarily used to refinance residential mortgages
it evolved as a means to finance public sector loans and ship mortgages over time. (source: German Association of Pfandbrief Banks). The global covered bond market volume (covered bonds outstanding) amounted to EUR 2.1 billion at year-end 2007. Percentage by country: Germany: 42%, Denmark
: 16%, Spain
: 13%, France
: 10%, Sweden
: 4%, United Kingdom
: 4%, Ireland
: 3%, Luxembourg
: 2%, Switzerland
: 1%, Austria
: 1%, Netherlands
: 1%, United States: 1%, other: 3%.
(1756–1763) that had ravaged the country Prussia
n King Frederick the Great introduced the Pfandbrief system with a ”cabinets-order” to ease credit shortage for the nobility. Based on his royal decree, Prussia set up so-called ”Landschaften,” compulsory public-law associations of noble landowners, within the individual provinces. To refinance loans to their members Landschaften issued debentures that largely correspond with the present-day mortgage Pfandbrief since the creditor acquired a direct claim over the estates the member had pledged as security. This Pfandbrief system rapidly spread throughout all of Europe. Towards the end of the nineteenth century, it was widely adopted for the refinancing of public sector loans. The second decisive boost to the development of the Pfandbrief occurred when Landschaften outside Prussia
started issuing Pfandbriefe for which all the properties lent against by the Landschaft served jointly as security. As before the loans raised by the Landschaften were not paid out in cash, but in Pfandbriefe. In 1862, the first German mortgage bank, Frankfurter Hypothekenbank in Frankfurt am Main, opened its doors. Numerous other mortgage banks followed in rapid succession in almost all German federal states. By the beginning of the twentieth century 40 private mortgage banks existed. Mortgage banks concentrated from the outset on real estate financing. The rapidly expanding towns and cities in the area of industrialization were in need of the housing construction and commercial properties financing. The 1900 Mortgage Bank Act (HBG) is deemed pioneering legislation until today. It provided a legally prescribed, uniform organizational framework for this group of credit institutions. It was in force for more than a century until the Pfandbrief Act entered into force in 2005 (source: Association of Pfandbrief Banks).
they are fundamentally different. Pfandbrief cover-assets remain on the bank's balance sheet. By contrast, asset-backed securities are typically off-balance-sheet transactions. Another difference: Pfandbrief cover pools are dynamic. Their composition can and usually does change over time, depending on the maturities and on the newly registered cover assets. Due to the stringent legal provisions that govern their issuance Pfandbriefe are deemed particularly safe. An independent cover pool trustee appointed by the Federal Financial Supervisory Authority (BaFin
) records cover assets and cover asset replacements in the cover register. In the event of the Pfandbrief issuer's insolvency, Pfandbrief investors have a preferential claim on the cover assets in the cover register because cover pool assets are not included in insolvency proceedings. There has not been a Pfandbrief default since 1901. Property financings may be included in the cover pool only up to 60% of the prudently calculated mortgage lending value. The same holds true for ship and aircraft financings. Public sector loans are 100% eligible for cover.
Bond credit rating
In investment, the bond credit rating assesses the credit worthiness of a corporation's or government debt issues. It is analogous to credit ratings for individuals.-Table:...
German bank
Banking in Germany
Banking in Germany is a highly leveraged industry, as its average leverage ratio as of 11 October 2008 is 52 to 1 ; its short-term liabilities are equal to 60% of the German GDP or 167% of its national debt.-Market overview:Germany has universal banking.The private customer...
debenture
Debenture
A debenture is a document that either creates a debt or acknowledges it. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note...
, has become the blueprint of many covered bond
Covered bond
Covered bonds are debt securities backed by cash flows from mortgages or public sector loans. They are similar in many ways to asset-backed securities created in securitization, but covered bond assets remain on the issuer’s consolidated balance sheet....
models in Europe and beyond. The Pfandbrief is collateralized by long-term assets such as property mortgages or public sector loans as stipulated in the Pfandbrief Act. Total volume outstanding in Pfandbriefe was EUR 806 billion as at end-2008. Pfandbrief bonds make up the third largest segment of the German bond market after public sector bonds and unsecured bank debt.
The Pfandbrief: part of the global covered bond market
Originally created in PrussiaPrussia
Prussia was a German kingdom and historic state originating out of the Duchy of Prussia and the Margraviate of Brandenburg. For centuries, the House of Hohenzollern ruled Prussia, successfully expanding its size by way of an unusually well-organized and effective army. Prussia shaped the history...
in 1769, Pfandbrief-like securities have been introduced in more than 25 Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
an countries – and in recent years also in the United States of America
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
and other countries outside Europe – each with their own unique law and regulations. Today, continental Europe's covered bond market is well established. Initially primarily used to refinance residential mortgages
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
it evolved as a means to finance public sector loans and ship mortgages over time. (source: German Association of Pfandbrief Banks). The global covered bond market volume (covered bonds outstanding) amounted to EUR 2.1 billion at year-end 2007. Percentage by country: Germany: 42%, Denmark
Denmark
Denmark is a Scandinavian country in Northern Europe. The countries of Denmark and Greenland, as well as the Faroe Islands, constitute the Kingdom of Denmark . It is the southernmost of the Nordic countries, southwest of Sweden and south of Norway, and bordered to the south by Germany. Denmark...
: 16%, Spain
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
: 13%, France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
: 10%, Sweden
Sweden
Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....
: 4%, United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
: 4%, Ireland
Ireland
Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth...
: 3%, Luxembourg
Luxembourg
Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...
: 2%, Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
: 1%, Austria
Austria
Austria , officially the Republic of Austria , is a landlocked country of roughly 8.4 million people in Central Europe. It is bordered by the Czech Republic and Germany to the north, Slovakia and Hungary to the east, Slovenia and Italy to the south, and Switzerland and Liechtenstein to the...
: 1%, Netherlands
Netherlands
The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...
: 1%, United States: 1%, other: 3%.
History
The roots of the German Pfandbrief system reach back to the year 1769. In the aftermath of the Seven Years' WarSeven Years' War
The Seven Years' War was a global military war between 1756 and 1763, involving most of the great powers of the time and affecting Europe, North America, Central America, the West African coast, India, and the Philippines...
(1756–1763) that had ravaged the country Prussia
Prussia
Prussia was a German kingdom and historic state originating out of the Duchy of Prussia and the Margraviate of Brandenburg. For centuries, the House of Hohenzollern ruled Prussia, successfully expanding its size by way of an unusually well-organized and effective army. Prussia shaped the history...
n King Frederick the Great introduced the Pfandbrief system with a ”cabinets-order” to ease credit shortage for the nobility. Based on his royal decree, Prussia set up so-called ”Landschaften,” compulsory public-law associations of noble landowners, within the individual provinces. To refinance loans to their members Landschaften issued debentures that largely correspond with the present-day mortgage Pfandbrief since the creditor acquired a direct claim over the estates the member had pledged as security. This Pfandbrief system rapidly spread throughout all of Europe. Towards the end of the nineteenth century, it was widely adopted for the refinancing of public sector loans. The second decisive boost to the development of the Pfandbrief occurred when Landschaften outside Prussia
Prussia
Prussia was a German kingdom and historic state originating out of the Duchy of Prussia and the Margraviate of Brandenburg. For centuries, the House of Hohenzollern ruled Prussia, successfully expanding its size by way of an unusually well-organized and effective army. Prussia shaped the history...
started issuing Pfandbriefe for which all the properties lent against by the Landschaft served jointly as security. As before the loans raised by the Landschaften were not paid out in cash, but in Pfandbriefe. In 1862, the first German mortgage bank, Frankfurter Hypothekenbank in Frankfurt am Main, opened its doors. Numerous other mortgage banks followed in rapid succession in almost all German federal states. By the beginning of the twentieth century 40 private mortgage banks existed. Mortgage banks concentrated from the outset on real estate financing. The rapidly expanding towns and cities in the area of industrialization were in need of the housing construction and commercial properties financing. The 1900 Mortgage Bank Act (HBG) is deemed pioneering legislation until today. It provided a legally prescribed, uniform organizational framework for this group of credit institutions. It was in force for more than a century until the Pfandbrief Act entered into force in 2005 (source: Association of Pfandbrief Banks).
German Pfandbrief legislation
The Pfandbrief Act (Pfandbriefgesetz), established in 2005 and amended in 2009, closely regulates the Pfandbrief. While most European countries have covered bond legislation, the United States and UK initially preferred non-legislative guidelines. The 2005 Pfandbrief Act increased potential issuers to include all licensed credit institutions that meet certain requirements. Formerly, only specialized private mortgage banks and public sector banks could issue covered bonds in Germany. The Pfandbrief Act supersedes all prior existing Pfandbrief legislations. The 2009 amendment introduced the Aircraft Pfandbrief as the fourth Pfandbrief type.Pfandbrief characteristics
In their cover business, Pfandbrief banks grant property finance, public sector, ship and aircraft loans. Pfandbriefe have an average maturity of about five to seven years. While Pfandbriefe tend to be associated with asset-backed securitiesAsset-backed security
An asset-backed security is a security whose value and income payments are derived from and collateralized by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually...
they are fundamentally different. Pfandbrief cover-assets remain on the bank's balance sheet. By contrast, asset-backed securities are typically off-balance-sheet transactions. Another difference: Pfandbrief cover pools are dynamic. Their composition can and usually does change over time, depending on the maturities and on the newly registered cover assets. Due to the stringent legal provisions that govern their issuance Pfandbriefe are deemed particularly safe. An independent cover pool trustee appointed by the Federal Financial Supervisory Authority (BaFin
BaFin
The Federal Financial Supervisory Authority better known by its abbreviation BaFin is the financial regulatory authority for Germany. It is an independent federal institution with headquarters in Bonn and Frankfurt and falls under the supervision of the Federal Ministry of Finance...
) records cover assets and cover asset replacements in the cover register. In the event of the Pfandbrief issuer's insolvency, Pfandbrief investors have a preferential claim on the cover assets in the cover register because cover pool assets are not included in insolvency proceedings. There has not been a Pfandbrief default since 1901. Property financings may be included in the cover pool only up to 60% of the prudently calculated mortgage lending value. The same holds true for ship and aircraft financings. Public sector loans are 100% eligible for cover.
The German covered bond market
Pfandbrief issuers use pfandbriefe to fund loans that are secured by real estate liens, ship or aircraft mortgages or claims against public-sector bodies. Depending on the type of collateralization, these bonds are referred to as Mortgage Pfandbrief , Public Pfandbrief , Ship Pfandbrief or Aircraft Pfandbrief . Pfandbrief issuers have three different pfandbrief segments at their disposal: Jumbo pfandbriefe, traditional pfandbriefe and registered pfandbriefe. For the actual placement issuers have the choice between private placements and public offering. With a volume outstanding of EUR 806 billion, the Pfandbrief held a leading place in the European bond markets at year-end 2008. Pfandbriefe made up 22 percent of the German bond market in 2008: 71.9 percent of pfandbriefe were public pfandbriefe, 27.0% Mortgage Pfandbriefe and 1.1% Ship Pfandbriefe. The first Aircraft Pfandbriefe are expected to be issued in 2010.Jumbo Pfandbrief
The Jumbo Pfandbrief, first brought to market in 1995, arose from a need to attract international investors to a market that had been largely of domestic interest. Instead of individual banks placing large-volume issues, the Jumbo Pfandbrief allows an issuing syndicate with the goal of marketing Jumbo Pfandbrief issues and of subsequently ensuring market making. A Jumbo Pfandbrief must have a minimum issuance volume of EUR 1 billion. The average issue size of a Jumbo Pfandbrief is about EUR 1.5 billion. A minimum of five market makers is required. Jumbo Pfandbriefe must be listed on the German stock exchange. Total Jumbo covered bonds first-time sales amounted to EUR 161.3 billion in 2007. In 2007, the four biggest jumbo covered bond-issuing countries were France (24.7%), Spain (22.3%), Germany (20%), and the UK (10.7%).External links
- Association of German Pfandbrief Banks
- The Pfandbrief 2010/2011. Facts and Figures about Europe's Covered Bond Benchmark, published by the Association of German Pfandbrief Banks]
- European Covered Bond Council
- SIFMA announces formation of U.S. covered bonds traders committee