Security

Pfandbriefe are covered at all times by cover assets equal to not less than the nominal value of all outstanding issues. In addition, the total nominal amount of the cover assets must exceed the total nominal amount of the Pfandbriefe in circulation by two percent (Mortgage Pfandbriefe and Public Pfandbriefe) or five percent (Ship Pfandbriefe and Aircraft Pfandbriefe). In addition, pursuant to § 4 (1) PfandBG and under the German Net Present Value Regulation (Pfandbrief-Barwertverordnung), Pfandbrief banks are obligated to ensure that cover pools are over-collateralised by at least 2% (net present value) with respect to the outstanding Pfandbrief volume. The Net Present Value Regulation specifies how interest-rate and exchange-rate changes are to be measured, as well as the method for calculating the net present value. The net present value coverage must be sufficient to withstand certain fluctuations in interest rates and exchange rates, and this is to be ensured through the performance of weekly stress tests.

Mortgage loans, public-sector loans, ship mortgages, and aircraft mortgages that are funded using Pfandbriefe constitute separate cover pools. The cover assets in them primarily serve to satisfy Pfandbrief creditors, and should a Pfandbrief bank become insolvent, they are excluded from insolvency proceedings. Because of the rigorous requirements concerning cover pool quality, risk management, and high transparency, there has never been a Pfandbrief default, either under the Pfandbrief Act or under the law that it replaced, the Mortgage Bank Act (Hypothekenbankengesetz).

The PfandBG provides for additional protections, particularly for the holders of Mortgage Pfandbriefe. These include limiting a cover mortgage’s loan-to-value ratio to at most 60% of the conservatively calculated mortgage lending value. This safety cushion protects Pfandbrief holders against losses in value stemming from cyclical fluctuations in the market value of the assets in the cover pool. The comparably low risk of a portfolio composed of residential and commercial real estate loans is also evident from the preferential risk-weighting accorded to mortgage loans with a loan-to-value ratio of up to 60%. The 60% ratio for inclusion in cover also applies to Ship and Aircraft Pfandbriefe.

In addition to credit risk, attention is also paid to interest-rate and currency risk, as well as liquidity risk. For instance, in connection with calculating net present values, Pfandbrief banks are required to perform weekly stress tests that simulate drastic changes in interest rates and exchange rates. In addition, liquidity needs for the next 180 days are required to be covered at all times.

The fact that investments in Pfandbriefe are particularly secure has also been recognised at the EU level in the form of extensive regulatory privileges:

• higher investment limits for funds where Article 52(4) of the UCITS Directive is satisfied,
• preferential treatment with respect to risk weighting of covered bonds where Article 129 of the Capital Requirements Regulation (CRR) is satisfied,
• recognition as Level 1 or Level 2A liquid assets in connection with the liquidity coverage ratio (LCR) to be maintained by banks,
• ability of banks to use Jumbo-Pfandbriefe as Category II collateral and traditional Pfandbriefe as Category III collateral in connection with monetary policy operations of the European Central Bank,
• exemption from the clearing and collateralisation obligation under the European Markets Infrastructure Regulation (EMIR) with respect to derivatives used as cover assets for Pfandbriefe,
• flexible threshold calculation in connection with systematic internalisation pursuant to the second Markets in Financial Instruments Directive (MiFID II).

Pfandbriefe are classified as safe investments pursuant to the German Regulation on Collateral (Sicherheitenverordnung, SiV). The SiV defines those investments in which a guardian may invest his ward’s financial assets. Besides Pfandbriefe, these include German Bunds, for example.

The reform of guardianship and care law and the SIV entered into force as of 1 January 2023. This led to the replacement of several provisions of the German Civil Code (Bürgerliches Gesetzbuch, BGB) in which safe investments had hitherto been listed. As a result, the term “mündelsichere Anlagen” (investments eligible for trusts) was replaced by “Anlagen nach der SiV” (investments pursuant to the SiV). Since the revision entered into force, other hitherto commonly used terms such as “Mündelsicherheit” (eligibility for trusts) and “Mündelgeld” (trust money) are likewise no longer to be found in the regulatory texts. More importantly, however, Pfandbriefe continue to be listed in the new provisions as a safe investment and therefore remain eligible as an investment option for persons under guardianship.