Cover register and Administration of the cover pools

Cover registers are highly important. All the assets recorded in one cover register belong to the respective cover pool and are, in the event of the Pfandbrief Bank becoming insolvent, subject to the cover pool administrator’s right of management and disposition.

Cover assets e.g. mortgages or claims against Government bodies must be entered in cover registers (§ 5 Pfandbrief Act).
A separate register is to be maintained for each Pfandbrief type. The entry of derivatives is subject to approval by the derivative counterparty and the cover pool monitor. The cover registers, which may also be kept electronically, must be passed on to BaFin at regular intervals, where they are stored. Details on the maintenance of the cover registers are set forth in the Cover Register Statutory Order (Deckungsregisterverordnung).

The cornerstone of the safety of the Pfandbrief is the fact that the Pfandbrief creditors’ entitlement against the Pfandbrief Bank to payment is secured by the cover pools which, in the event of the Pfandbrief Bank’s insolvency, are to serve primarily to satisfy the Pfandbrief creditors’ claims. Thus it is essential that, should insolvency occur, the cover pools contain sufficient cover assets to satisfy the Pfandbrief creditors’ claims punctually. This is achieved, first of all, in that the nominal value and the net present value of the Pfandbriefe outstanding are covered at all times by matching cover pools (§ 4 Pfandbrief Act).

Net present value

The Net Present Value Regulation (Barwertverordnung) stipulates in detail how the net present value is determined, and permits three methods for calculating the net present value. These methods use different fictitious changes of interest rates and exchange rates which are to be taken into account when determining the net present value. The cover pools are subjected to defined stress scenarios, so that in effect a net present value cover surplus results. Moreover, excess cover must be maintained in net present value terms which amounts to 2 % of the Pfandbrief liabilities to be covered, and which must be invested in particularly liquid assets. The purpose of this mandatory overcollateralization is, in the event of the Pfandbrief Bank’s insolvency, to cover risks that may arise as well as administrative expenses payable, and to meet liquidity management costs. Over and above this, it is at the issuer’s discretion to maintain further excess cover. Most rating agencies stipulate this as a precondition for awarding top ratings to Pfandbriefe.

Active administration

Unlike those for Mortgage Backed Securities, cover pools for Pfandbriefe are dynamic. This means their composition changes over time, depending on the maturities and the assets that are newly registered and included in cover. Loans are repaid or are removed from the cover for other reasons, to be replaced by new loans, and new lending is included in cover to enable the Pfandbrief Bank to issue new Pfandbriefe. Thus, the cover pools have to be actively administered to assure matching cover at all times. The Pfandbrief Act stipulates that risk management systems must be installed to identify, assess, control and monitor the relevant risks such as counterparty risks, interest rate, currency and other market price risks, operational risks and liquidity risks (§ 27 Pfandbrief Act).

Limiting the shortterm liquidity risk

As part of the 2009 amendment, a new provision was included in Section 4 (1a) PfandBG to limit short-term liquidity risk, which was aligned with the Capital Requirements Regulation (CRR) in the 2022 Pfandbrief amendment. Accordingly, the maximum cumulative liquidity requirement for the next 180 days must be secured by assets that meet the requirements of the LCR (Articles 10-12) and are valued for this purpose (Article 9) or deposits with suitable credit institutions with a maximum remaining term of three months. Various volume limits do not apply to such assets, which are included in the cover register solely for liquidity management purposes, section 4 (1a) sentence 2 PfandBG.

Transparency of the Cover Pools

To give investors as exact and up-to-date a picture as possible of the composition of the cover pools and the Pfandbriefe outstanding, Pfandbrief Banks are required to publish certain information on a quarterly basis and additional data annually. Such information includes, for instance, the regional distribution of the cover assets, the type of properties lent against, the debtors of public-sector liabilities and the amount of claims that are at least 90 days in arrears. This allows Pfandbrief creditors to compare the cover pools of different Pfandbrief Banks. The 2010 amendment of the Pfandbrief Act provided for a period of one month after the end of each quarter. The quarterly report must be published within this one-month period; this period will be extended to two months for the fourth quarter.