vdp comments on yesterday’s ECB decision and calls for further steps

The Association of German Pfandbrief Banks (vdp) welcomes yesterday’s decision by the ECB, but at the same time urges it to go even further:

“It is good that the ECB is now going to roll back its bond purchases faster than originally planned. However, it still has not specified a definitive end date for the APP,” vdp’s Chief Executive, Jens Tolckmitt, noted critically.

Having already decided in recent months to make purchases under the Pandemic Emergency Purchase Programme (PEPP) only until the end of March of this year, it decided yesterday to reduce the volume of purchases under the conventional Asset Purchase Programme (AAP) more quickly than initially planned. Specifically, it now plans to double the volume to EUR 40 billion only during April (no longer during the entire second quarter), to acquire EUR 30 billion of additional securities in May (which it had originally planned to do over the entire third quarter) and to reduce the purchase volume back down to EUR 20 billion as originally planned as early as June (instead of holding off on this until after the third quarter). It is still uncertain whether the APP will be maintained at this level in the third quarter of this year or, indeed, possibly terminated. At any rate, ECB President Christine Lagarde announced that an interest-rate hike is possible in the third quarter after the bond purchases end.

But even if the PEPP is about to expire soon, and with the APP possibly expiring in the autumn, that does not mean that the ECB will no longer be the main buyer of securities, inasmuch as the money from maturing PEPP securities, for example, will be reinvested at least until the end of 2024. The same is to be expected if the APP is terminated. For the third and fourth quarters of 2022 alone, APP maturities of around EUR 16 billion will be available for reinvestment.

“This latest step by the ECB could now actually be the beginning of the end of ultra-loose monetary policy. But many additional steps still remain as it is clear that, even after the PEPP and APP are officially ended, for some time the ECB will continue to be the most important market player, as money from maturing securities will be reinvested over the next few years, at a minimum. As a result, over the medium term, there will be no change in the distorted yield environment we have seen since the inception of the purchase programme in 2009,” emphasised Tolckmitt.

The Lobbying Register Act (Lobbyregistergesetz, LobbyRG) entered into force on 1 January 2022. Lobbyists are required to register with the new Lobbying Register by the end of February. vdp has already met this requirement and therefore has registered on time.

During the last legislative session, the Grand Coalition agreed that the German Bundestag would maintain a digital Lobbying Register that is available for public inspection. The duty to register applies to all individuals and organisations with direct or indirect influence on the decision-making processes of MPs, parliamentary groups or the Federal government. The provision applies to the entire leadership level, i.e. to contact with Parliamentary Secretaries of State, Secretaries of State and heads of departments and sub-departments.

As a banking association, vdp supports the Lobbying Register’s goal of transparency in lobbyists’ dealings with the Bundestag and the Federal government.

“Such registration is important and necessary,” explained vdp’s Chief Executive, Jens Tolckmitt. “Transparency in lobbying is an inseparable part of the democratic process and is in our own best interests, as lobbyists. Transparency is also important because in and of itself, it has the ability to correct the occasionally inaccurate image of lobbying portrayed by the media, science and politics.”

In addition to registering, all affected organisations and their lobbyist employees must accept a code of conduct regarding lobbying.

Transparency must include lobbying by elected representatives

Nevertheless, the wording of the law does not yet go far enough for vdp:

“The starting point for the discussion about the Lobbying Register was the total lack of transparency regarding lobbying activities by people elected to the German Bundestag. Currently, such activities are not even covered by the Lobbying Register. While this is a good start, transparency will need to be expanded even further in the future,” emphasised Tolckmitt. “In particular, we still do not have provisions requiring disclosure of lobbying by MPs.”

The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) is planning macroprudential measures at an unfortunate time and to an extent that is incomprehensible.

The supervisory authority clearly believes that the residential property market harbours risks for banks and as a result is planning to activate the countercyclical capital buffer as well as a sectoral risk buffer. According to BaFin, banks will then have more than EUR 22 billion in Common Equity Tier 1 capital. This will affect only banks, and not other lenders, who presumably will now provide more loans for private housing. That will propel ad absurdum BaFin’s intention of putting the brakes on the residential property market’s development.

“The limitation on banks’ lending capacity that will result from such measures will likewise be counterproductive. Ultimately, not only do banks ensure an adequate supply of credit to the real economy, but must and should, both now and in the future, not only support clients during the COVID-19 pandemic, but also finance the politically popular ecological and digital transformation of the economy,” says vdp’s Chief Executive, Jens Tolckmitt.

According to Tolckmitt, “There are no discernible trends in Germany’s housing market that would justify the severity of the measures being adopted by BaFin.”

Banks’ lending standards are risk-oriented and borrowers are acting accordingly, as demonstrated by current data from vdp’s regular survey on residential property financing (latest survey from 2021): recently, the borrowed funds ratio has decreased to an average of 80%, while the amount of own funds contributed has increased significantly. In addition, the Mortgage Credit Directive (Wohnimmobilienkreditrichtlinie, WIKR) has been in force since 2016. Under the WIKR, banks also check carefully whether a potential loan to the borrowing household is appropriate. The percentage of loan-servicing costs to the acquiring household’s disposable income, the debt service ratio, decreased over the past two years from 26% to 25%, a level that is remarkably low compared to the long-term figure. Furthermore, the changes in banks’ loan portfolios indicate that borrowers have undertaken substantial repayments. Since 2015, the average initial repayments have been around 3%. Current loans are being serviced and private households’ debt sustainability is so far robust – as BaFin has confirmed in its latest Financial Stability Report. Germany is reporting a solid trend in its labour market and private households’ income has remained largely constant, even during the pandemic. In addition, borrowers have accepted loan conditions for long periods of time, agreeing to lock in interest rates for 14 to 15 years.

All in all, the parameters indicate that residential property financing in Germany is extremely stable. Consequently, it is highly unlikely that any problems will spill over into the financial sector – financial stability is guaranteed. The fact that such serious measures are now being planned by regulators is clearly attributable to pressure from international institutions. But the important thing here is the message: the situation in Germany is not necessarily comparable to that of other countries.

Indeed, price increases on the German residential property market can be explained by fundamentals and there are no signs of an abrupt decline in residential property prices. On the contrary: demand still exceeds supply and there are no signs of vacancies in still unpaid-for residential properties such as those seen in the USA or Spain. On the other hand, there is a risk that the planned macroprudential measures will prevent urgently needed investments in new housing construction, as well as upgrades in the energy-efficiency of the existing housing stock, which the new Federal government has set as one of its main priorities. In this case, the necessary expansion of the housing supply, which is expected to lower prices, will not go ahead. Climate protection will also suffer a considerable setback if the renovations required to lower CO2 emissions are not undertaken.

Digitalisation continues to progress within the financial sector, and has recently also reached the area of securities issuance. Before digital solutions can be implemented in this area, however, the corresponding legal framework needs to be adjusted.

This issue is already on the German government’s radar. In its coalition agreement of 12 March 2018, it set out its plans to boost Germany’s role as one of the world’s leading digital technology and fintech locations. In this context, the Federal Ministry of Justice and Consumer Protection and the Federal Ministry of Finance published a key-issues paper back in spring 2019 discussing the regulatory treatment of electronic securities and crypto tokens. This has now resulted in the introduction of the German Electronic Securities Act (Gesetz über elektronische Wertpapiere, eWpG), which was published in the Federal Law Gazette on 9 June 2021 and entered into force on 10 June 2021.

Under this new legislation, paper securities certificates will no longer be mandatory, as it will also be possible to issue bonds electronically by entering them in an electronic securities register.

To ensure that Pfandbriefe can also be issued electronically, sections 4 (5) and 8 (3) German Pfandbrief Act (Pfandbriefgesetz, PfandBG) will be adjusted by supplementing, as opposed to modifying, current issuance practice. This will mean that a Pfandbrief issued as an electronic security will be able to be put into circulation once the trustee certificate pursuant to section 8 (3) sentence 1 PfandBG has been submitted – prior to entering the Pfandbrief in an electronic securities register – to the same registrar to which the issuance conditions for the Pfandbrief were also submitted.

The new Electronic Securities Act therefore lays the foundation for the digitalisation of securities legislation. However, it remains to be seen how these new developments will impact Pfandbrief business and whether they will lead to the issuance of an electronic Pfandbrief in the near future.

The practical implementation of these new regulations is currently the subject of intensive discussion by the responsible vdp committees.

The German Bundestag (Lower House) today passed the German CBD Implementation Act, which transposes the European Covered Bonds Directive into German law, thereby driving the European harmonization of covered bonds forward. The main impetus behind this harmonization has been generated by the German Pfandbrief Act.

The legislative package envisages an extensive amendment of the Pfandbrief Act and ensures that German Pfandbriefe will continue to enjoy EU privileges. The vdp explicitly welcomes the CBD Implementation Act, as it is closely modeled on European requirements and contains important improvements and clarifications. “Besides bringing German law into line with EU legislation, the Pfandbrief Act amendment sets forth important rules on building insurance in particular as well as on maturity extension, which the vdp has advocated for quite some time,” vdp Chief Executive Jens Tolckmitt pointed out.

National legislators have until July 2021 to anchor the European regulations in national law. The second reading in the German Bundesrat (Upper House) is scheduled for May 7, 2021. With that, Germany is likely to become the first country to complete the relevant parliamentary process.

The entire vdp team wishes you a happy new year and all the best, especially health, of course. May 2021 be less turbulent, more optimistic, more carefree – simply better – than its predecessor.  We look forward to continuing to work with you and to meeting you face to face, which we hope will soon be possible again.

vdp expands its social commitment

It has always been a matter of importance to the Association of German Pfandbrief Banks (vdp) to assume social responsibility and to make a yearly Christmas donation for people in need of support.

This year the money will go to not one but two Berlin organizations: a project that supports young people and a project for the homeless, who are particularly vulnerable during the cold winter months.

“Through the dedicated work of these organizations, our money will go to two very worthy causes and reach those who are urgently in need of help,” explained vdp’s Chief Executive Jens Tolckmitt.

In addition to the vdp’s traditional Christmas donation, the Association has this year launched a second campaign for the benefit of others: the “Christmas Wish Tree”. At the heart of this campaign lies personal financial support that comes from the vdp’s staff members. The idea here is that they fulfil the Christmas wishes of children who are sick, have suffered bad experiences or come from a difficult family background. For these boys and girls, it is anything but certain that they will receive the Christmas gifts they wish for.

“We are delighted that, through our support, the children can have an even happier Christmas,” the vdp’s Head of Communications Carsten Dickhut remarked.

It was on Christmas Eve of 1770 that the first agricultural Pfandbrief was issued, based on the “cabinet order” that Frederick the Great passed in 1769.

The issue by what was known as the Silesian landowners’ association met with an enthusiastic reception, becoming the “fancy of the world of capital” at that time. And it has remained a firm favourite right up to the present. Ever since then, Pfandbriefe have remained one of the cornerstones of the financial system. “Old Fritz” put his signature, in 1769, to what would become a body of rules that the financial world continues to this day to view as one of great significance.

Last Wednesday the EU Commission published its strategy paper for a Renovation Wave to improve the energy efficiency of buildings.

According to this paper, the Commission aims to double the rate of renovation over the next ten years. By 2035, 35 million buildings could be renovated and up to 160,000 additional jobs could be created in the construction industry. The Renovation Wave is part of the implementation of the EU’s Green Deal.

The Association of German Pfandbrief Banks (vdp) and its member institutions expressly welcome the Renovation Wave because they feel committed to the transformation to a more sustainable economy. “In order to achieve climate neutrality in Europe, the containment of energy consumption in buildings will play an important role,” affirmed vdp Chief Executive Jens Tolckmitt.

The annual energy renovation rate is low at some 1%. One of the main reasons for this is the high implementation costs, which are often higher than the savings achieved through lower energy costs. “The Renovation Wave is an opportunity and can make a significant contribution to reducing greenhouse gas emissions in Europe – but for a successful result the existing financing gap between renovation costs and savings must be closed, Tolckmitt emphasized.

The EU Commission estimates the investment requirement at 275 billion euros annually.

Given that the Pfandbrief celebrated its 250th anniversary last year, the jumbo Pfandbrief is still comparatively young in years. It’s only been 25 years since the first large-volume Pfandbrief came onto the market.

The pioneer then was Frankfurter Hypothekenbank, issuing on May 26, 1995, a public Pfandbrief in the amount of DM 500 million that was topped up to DM 1 billion a few months later – a volume considered sensationally high at the time.

The second large-volume Pfandbrief issue followed on July 27, 1995, brought this time by Bayerische Vereinsbank. It was when marketing this mortgage Pfandbrief, the volume of which was increased a few months after being issued from initially DM 500 million to DM 2 billion, that the prefix “jumbo” first came into use.

Whereas, to begin with, the term “jumbo” referred to Pfandbriefe with a volume of DM 500 million or more, the introduction of the euro saw the minimum volume raised to EUR 500 million. When the Association of German Mortgage Banks (VdH), the predecessor of the Association of German Pfandbrief Banks (vdp), undertook the modernization of the minimum standards for jumbo Pfandbriefe in 2003, the minimum required size of a “jumbo” was doubled to EUR 1 billion.

In the following short interview, Sascha Kullig, Member of the vdp’s Board of Directors and Department Head of Pfandbrief, Capital Markets and Investor Relations, describes the rapid development of the jumbo Pfandbrief market since 1995.

How, in your view, has the jumbo Pfandbrief market developed since 1995?

In 1995 the jumbo Pfandbrief was the right instrument at the right time. The German federal government stepped up its capital market activities significantly after German reunification. At the same time, the capital markets became more international, new investors appeared and good secondary market liquidity gained in importance. The jumbo Pfandbrief was the German mortgage banks’ response to the changing market environment. With it they laid the foundation for the Pfandbrief and covered bond market as we know it today. The market grew rapidly, thanks also to the minimum standards for jumbo Pfandbriefe, which the VdH (now the vdp) developed in March 1996. By the end of 1996 the volume of jumbo Pfandbriefe climbed to more than DM 120 billion, and the market went on to reach its peak in mid-2003, with an outstanding volume of around EUR 420 billion. This success story attracted the attention of other countries to the product. Thus, it is certainly due in no small measure to the jumbo Pfandbrief that covered bonds are firmly established throughout most of Europe today and are generating more and more interest at the global level. The jumbo Pfandbrief is, moreover, a good example of how the reliable, traditional Pfandbrief can serve as a basis for creating outstanding innovations.

Jumbo Pfandbriefe feature in one-tenth of the Pfandbrief’s history spanning just over 250 years. How important are “jumbos” for the Pfandbrief market today?

The jumbo Pfandbrief has had a history characterized by change, including some difficult times, and the response has always been to adapt, for instance by amending the minimum standards. Whereas jumbo Pfandbriefe, i.e. large-volume Pfandbriefe with a minimum issue size of EUR 1 billion, accounted for around 36% of the total outstanding volume of Pfandbriefe in 2005, their share today is only in the region of 13%. There are a variety of reasons for this. For example, the outstanding volume of public Pfandbriefe, which once made a major contribution to the success of the jumbo Pfandbrief, has shrunk significantly since roughly the turn of the millennium. At the same time, legal provisions have been introduced which, to some extent, make it more difficult to issue jumbo Pfandbriefe. Cases in point are the net present value calculation of cover with interest rate and currency stress tests as well as, above all, the introduction of a liquidity buffer. Against this background, benchmark issues, i.e. large-volume Pfandbriefe with an issue size of at least EUR 500 million, currently play a far greater role. Yet it would be wrong to infer from this that the jumbo Pfandbrief faces extinction. It remains for many Pfandbrief banks an important refinancing instrument that satisfies the needs of major investors.

How has the economic crisis in the wake of Covid-19 affected the Pfandbrief market in general and “jumbos” in particular to date?

The Pfandbrief market got off to a good start in 2020. For one thing, three jumbo Pfandbriefe had been issued by the beginning of March. When the Covid-19 pandemic broke out in Europe, the placement of Pfandbriefe in the market at first came to a near-standstill. However, that was not because it was no longer possible to sell Pfandbriefe. Rather, the German Pfandbrief banks opted for the refinancing facilities available through the European Central Bank (ECB), which for them were considerably more favorable. To this end, they issued Pfandbriefe and used them as collateral with the Eurosystem. This also explains the, at first glance, seeming paradox of the high issue volume in 2020. According to the Deutsche Bundesbank, more Pfandbriefe were issued in the first five months of this year than in the same period one year before. That said, two jumbo Pfandbriefe and two benchmark issues were brought to the market in June 2020. This demonstrates that confidence in and demand for Pfandbriefe are intact.

The Association of German Pfandbrief Banks (vdp) has developed jointly with its member banks an Amortization Moratorium in respect of commercial property mortgage loans, which member banks can join should they wish. The moratorium represents a contribution to overcoming the COVID-19 crisis in the real estate sector. Banks that join are required to inform their customers accordingly. The main conditions of the moratorium are listed below.

Loans and borrowers affected:

• Member banks of the vdp which have joined the vdp Amortization Moratorium
• Beneficiaries: borrowers of loans secured with security rights on immovable properties where at least 50% of the income is not generated through residential use
• Properties in Germany and in other countries; in other countries, however,
  • additionally with separate agreement in keeping with the legal position in the respective country
  • only if a transaction avoidance in insolvency (retroactive action) or comparable measure is precluded, and
  • not another moratorium is applicable in the respective country (after the bank has joined the moratorium in that country)
• Borrowers must not be consumers.

Conditions:

• Loan contract before March 14, 2020, disbursement as per contract up until then
• Payment as per loan contract of interest and amortization up until March 31, 2020
• Income on the property affected by the pandemic
• With regard to the financial situation at the time of filing the application and to continuing the property from an economic perspective, it is not economically reasonable to service the loan under the terms and conditions in effect up until then
• No profits, dividends etc. distributed since the crisis
• Borrower makes appropriate use of available liquidity to continue servicing debt and seeks to obtain economic support through public programmes
• In the case of syndicate financing, possible only if all the banks involved have joined this moratorium or give consent
• If the bank needs the consent of third parties, then possible only with their consent
• Decision on the application by 30 September 2020

Trigger:

• Application by the borrower in written or text (electronic) form

Effect:

• Extension (Deferral) of all principal payments falling due as from application up until end of December 2020
• No extension of interest payments
• Interest in the agreed amount on the higher principal amount due compared to the payment schedule in effect up until then
• No prolongation of the life of the loan (or of the interest rate fixation period); as a result, higher residual principal at the end of the life
• Borrower may pay the deferred amounts on any scheduled payment date (one week’s prior notice)
• Borrower may pay the deferred amounts later at any time (one week’s prior notice)
• Borrower’s interest rate hedges are not changed by the moratorium
• Bank does not charge any fees (third-party costs are possible, however)