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In the last couple of years, mortgage Pfandbriefe issuance has been gaining a larger share of the Pfandbrief pie, which has shrunk from €221.5 billion in 2003 to just €49.5 billion last year, Association of German Pfandbrief Banks data show.
However, rule changes by the German financial regulator BaFin, requiring matching liabilities in line with global regulatory capital reform, could prompt significant numbers of the country’s 400-plus deposit taking banks to begin issuing mortgage Pfandbriefe.
“BaFin wants to make sure an offer comes from ratings agencies by ensuring there’s more matching of assets and liabilities, because they’re concerned about banks lending long but funding themselves short-dated,’’ says Cristina Costa, senior covered bonds analyst at Société Générale. “Pfandbrief issuance is a good solution. By shifting assets into the cover pools the banks will be able to issue more, but the funding will be done by mortgage Pfandbriefe.’’
Rising prices
Real estate prices have been rising in Germany for five years, climbing by an annual average of 5.7% nationwide. In cities like Berlin, Hamburg and Munich prices are up by around a third over the same period, according to real estate consultancy Bulwiengesa.
New mortgages are forecast to reach €197 billion this year, according to data from Interhyp, but Pfandbrief issuance has barely risen.
Savings Banks already hold around half of the 70 licences BaFin has granted to institutions to issue mortgage Pfandbriefe, German real estate bank DG Hyp reports.
But according to Florian Hillenbrand, senior covered bonds analyst at UniCredit in Frankfurt, few savings banks are active in the Pfandbrief market, despite the increasing volume of mortgages provided by the sector.
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Real estate survey 2014: Results index |
“Some of the larger savings banks are currently in the market but I think we will see the savings bank sector increasing its Pfandbrief activity more and more because of the Net Stable Funding Ratio requirement of the CRR in Basel III,” he says. “Currently, German savings banks are strong in lending but their largest funding base effectively is deposits, which is good, but deposits are not long-term funding. If you want to do long-term lending you also need to show some long-term funding and that’s something you can do with a Pfandbrief. So there is a decent incentive for savings banks in particular to do that.’’
Not every savings bank would need to issue separately. Banks too small to issue on their own account can use the German refinance register, where one bank registers assets held on its balance sheet, which are then held in a bankruptcy-remote estate that can be used to ‘transfer’ the assets to another bank. Pledged assets that are on the balance sheet of one bank have explicit legal backing to be used as collateral for a Pfandbrief issued by a second bank.
Hillenbrand says Germany could employ a pooled Pfandbrief funding model using large wholesale regional banks, for example, Bayern LB, as hubs, taking on assets from savings banks and issuing Pfandbriefe. “The question is not how many savings banks are going to be active, but rather how much of the aggregate mortgage lending in the savings bank sector is one day going to find its way to a mortgage Pfandbrief cover pool,” he says.
