The German Mortgage Bank Association - or the Verband Deutscher Hypothekenbanken (VDH) to give the organization its proper title - is expecting amendments to the German Mortgage Bank Act to come into force next year. Some proposed changes, particularly the idea of adding derivatives to Pfandbrief collateral pools, have caused sharp intakes of breath, because of the counterparty risk that would be introduced to the book. Suddenly, the hidebound VDH is recast as a revolutionary body.
"I can't see this happening," says a director of capital markets at a large German Landesbank. "In effect we are talking about changes to the legislation that would permit mortgage banks to issue a Pfandbrief and do a swap against it and arbitrage the credit risk between the issuer and the swap market. In situations where you see most of the Pfandbriefe trading at sub-Libor, that would provide an immediate...
