Foreign public-sector lending

The German Pfandbrief Act (Pfandbriefgesetz, PfandBG) also contains legal requirements for determining whether a Pfandbrief bank’s claims against a foreign public debtor are eligible as cover assets for a Public Pfandbrief.

Distinction between EU/EEA countries and other countries

In the case of foreign public-sector lending, the PfandBG establishes different requirements for eligibility as cover depending on whether the debtor is located in an EU/EEA country or in Switzerland, the U.S., Canada, or Japan.

  • Public debtors in EU/EEA countries

In EU/EEA countries, claims against central governments, their central banks, and public-sector entities are eligible as cover without being linked to a specific credit quality step.
In light of this situation, the vdp member institutions unanimously approved what is known as the Credit Quality Differentiation Model for EU states at their annual Members' Meeting held in June 2012. Under this vdp standard, haircuts are applied separately to claims against EU states with a non-investment grade rating outside of the cover calculation that is required by law.

  • Public debtors in Switzerland, the U.S., Canada, or Japan

In the case of claims against Switzerland, the U.S., Canada, or Japan, as well as against their central banks and public-sector entities, such claims are eligible as cover only if the public debtor is allocated to credit quality step 1. For public-sector entities, calculation of the credit quality step depends on how the state exercised its discretionary right under the Basel II accord, i.e. whether it opted to use the method based on the state of incorporation or that based on the credit quality step.
Section 20 (1) No. 3 PfandBG contains a rule that is to be applied where the public debtor’s credit quality is downgraded from step 1 to step 2 after the claim has been included in cover. In such a case, the claim remains eligible as cover as long as it does not exceed 20% of the total amount of the outstanding Public Pfandbriefe.

International organisations and multilateral development banks

Pursuant to Articles 117 and 118 of Regulation (EU) No. 575/2013 (Capital Requirements Regulation, CRR), claims against the European Central Bank, multilateral development banks, and international organisations are also eligible as cover.

State-guaranteed export credit insurance (business with export credit agencies (ECAs))

Under certain conditions, state-guaranteed export credit financing may be funded using Public Pfandbriefe. This is particularly the case where the state itself is acting as the ECA guarantor (e.g. the Federal Republic of Germany in the case of Hermes financing).
Since 2009, however, ECAs have also been permitted to act as potential guarantors under section 20 (1) No. 2 PfandBG, provided that they meet the requirements for a “public-sector entity” within the meaning of the CRR. In addition, the specific ECA guarantee has to satisfy statutory requirements.

The “10% limit” (section 20 (2a) PfandBG)

The security of public-sector loans made to debtors outside of Germany is also dependent on the ability of Pfandbrief creditors to enforce their right to separate satisfaction in insolvency proceedings in those countries. The PfandBG therefore specifies that claims for which this right is not assured may not exceed 10% of the total amount.
Determining whether a country provides a right to separate satisfaction in insolvency proceedings for the purpose of complying with the 10% limit sometimes requires extensive research of that country’s law.