Supervision and granting the license

In addition to general banking supervision, a Pfandbrief Bank is subject to a special form of supervision by the Federal Financial Supervisory Authority (BaFin), the aim of which is to monitor observance of the Pfandbrief Act and the regulations issued in connection with it.

Granting the License

Pfandbrief business is a line of banking business. To be awarded a license to engage in Pfandbrief business, a credit institution must fulfill special requirements. For example, it must have core capital of at least € 25 million and be licensed to conduct lending operations within the meaning of the German Banking Law (Kreditwesengesetz, KWG). Moreover, the credit institution must:

  • have at its disposal suitable procedures and instruments for managing the risk entailed in the cover pools on the one hand and its issuing operations on the other,
  • prove that it intends to engage in Pfandbrief business on a regular and sustained basis, and
  • put the appropriate organizational structure and resources into place.

In stipulating these special conditions for the granting of a license, legislators seek to ensure that each credit institution conducts its Pfandbrief business seriously and in a sustained manner by linking the assumption of Pfandbrief business with substantial effort on the bank’s part. This is intended to make it more difficult to engage in opportunistic, short-term business strategies.
Because a Pfandbrief Bank needs a separate license for each of the Pfandbrief categories, it must prove it has the requisite expertise in the various operations eligible as Pfandbrief cover.

Special Supervision and Cover Audits

The prerequisite for the Pfandbrief market to function effectively is the highest and the most uniform standard of safety possible, across all issuers. For this reason, the special supervision of Pfandbrief Banks must be conducted according to uniform principles.

The “Pfandbrief Competence Center – Basic Issues and Cover Audits at Pfandbrief Banks” was set up at BaFin to ensure the uniform application and interpretation of the Pfandbrief Act. Besides the ongoing supervision, a further feature is the cover audits, which are performed at regular intervals of, usually, two years. Their purpose is to examine the cover pool assets by way of random checks, and they are conducted or monitored by the “Pfandbrief Competence Center” at BaFin to make sure that uniform standards and requirements are complied with.

Cover Pool Monitor

Cover pool monitors are to be appointed at every Pfandbrief Bank. Their task is to see to it that the statutory cover for the Pfandbriefe is given and that the cover assets are duly entered in the respective cover register. Appointed by BaFin, cover pool monitors are not answerable to the bank, the supervisory authority or the Pfandbrief creditors. The function they perform is shaped solely by law. BaFin may revoke the appointment for an objective reason. Thus, the cover pool monitor may be regarded as an independent monitoring body.