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vdp President Bettink: “Europe commits to the special safety of the Pfandbrief”

The European Commission's draft directive takes into consideration relevant to German Pfandbrief banks - Still room for improvement

The Association of German Pfandbrief Banks (vdp) welcomes in principle the draft directive presented Wednesday, July 20th, by the EU Commission on the implementation of the new global capital requirements. However, the vdp still sees room for improvement with regard to several questions concerning the Pfandbrief. “The passages of the Brussels draft directive that are relevant to the Pfandbrief largely take the special safety of Pfandbriefe and other covered bonds into consideration,” said Jan Bettink, President of the vdp, referring to the draft CRD IV (Capital Requirements Directive IV) with which new worldwide rules governing the capital of banks (“Basel III”) are to be transposed into European law. Speaking of the question of how much capital banks will need to back their Pfandbrief investments, Bettink added he is particularly pleased to note that, for the first time, the risk weight of the Pfandbrief is being considered independently of the creditworthiness of the issuer. This is a position the Association has advocated for years.

The abolition of the so-called seat principle had been brought into discussion very late on. With it, the risk weight of bank bonds – and therefore also of Pfandbriefe – would have been closely linked to the respective bank’s home country, ultimately doubling the requirement of own funds to back Pfandbrief investments. Bettink described the fact that this could be prevented following intervention by the German delegation as “an important sign of the institutional support in Europe for the Pfandbrief”. The discussed further tightening of capital backing requirements for real estate-secured commercial loans was also averted.

The vdp believes that progress has also been made in terms of recognizing Pfandbriefe as highly liquid investment instruments for the liquidity buffer, which all banks will in future be required to maintain. Thus, in the Association’s opinion, it can no longer be ruled out that, according to the criteria still to be developed by the European Banking Authority (EBA), Pfandbriefe may also be included in the highest possible category for securities. However, the German Pfandbrief banks continue to take a critical view of the so-called run-off factor, which assumes that, in the event of a crisis, a bank would be unable to raise follow-up financing for maturing Pfandbriefe by issuing new Pfandbriefe. The recent past has clearly demonstrated the opposite, however.

Where Pfandbrief-based business is concerned, the vdp considers the draft directive to be in need of improvement in a number of points. For instance, the draft provides for the introduction of a leverage ratio as from 2018. If, as is planned at present, this limit on leverage is introduced as a mandatory supervisory ratio, the Pfandbrief banks’ traditionally conservative cover loan business would be jeopardized. This applies in particular to public-sector finance, which is essentially a low-credit-risk and therefore low-margin business field. “At the same time, this would be bad news for the public sector, because German Pfandbrief banks play a major role in the financing, above all, of German local authorities,” Bettink explained. He added that, for this reason, the vdp will continue to call for the introduction of the leverage ratio purely as an observation metric. In this context, Bettink places hopes in the impact assessment which is due to be carried out by 2017, and which will examine the implications of a binding leverage ratio for these business activities, amongst others. The vdp President commented that an early signal from policymakers giving the vdp member banks planning certainty would also be important.

“The appropriate regulation, at European level, of the Pfandbrief and Pfandbrief-based business ought to remain a priority of the German representatives in Brussels,” Bettink concluded.

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