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Mortgage banks learn from newcomers

The unthinkable is happening in European covered bonds. German mortgage banks no longer sneer at any attempt to mimic their market and its proud history of never producing a default. New and sophisticated covered bond laws in France and Luxembourg have improved on the Pfandbrief model. Because of this, German banks are now scrambling to copy other issuers’ refinements. Lack of uniformity is still a problem. International investors must comb through the different laws and regulations that characterize distinct European covered bond markets. Perhaps one day a single European market will finally emerge. Anja Helk reports

France, Spain, and most recently Luxembourg, now compete with the German Pfandbrief for the attention of international investors wishing to put funds into high-credit-quality collateralized bonds. These countries' new covered bonds have successfully been launched in jumbo format, spreads have tightened to German Pfandbrief levels and volumes are set to grow further.

The three new markets hardly present

an immediate threat to the original Pfandbrief market, which is now worth e1 trillion ($840 billion) - e367 billion of which fall in the jumbo sector where liquidity is adequate to attract non-German investors. But if they care to worry, where should German mortgage banks expect the toughest competition to come from?

The French obligations foncières are definitely the best instruments, say the French. The Spanish cédulas hipotecarias are also much better than the Pfandbriefe, so the Spanish claim - and Luxembourg's lettres de gage are so good they will conquer the market in no time, reckon bankers in the Grand Duchy. Considering that these new Pfandbrief versions show certain differences in detail, this battle could cause considerable short-term confusion among investors.

In the case of France and Luxembourg, new laws have been enacted - in June 1999 and May 2000 - that challenge the German Hypothekenbankgesetz (mortgage bank act) in security and sophistication.

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