250th anniversary of the Pfandbrief: Interview with Niek Allon
What has made the Pfandbrief turn 250 - a close to biblical age for a financial product?
The main cause of the 250 year success of the Pfandbrief is that the product has proven to be a very reliable and low cost funding tool for banks over time. With the Pfandbrief’s (or covered bonds in general) key features like dual recourse, high quality collateral, a strong regulatory framework and macroprudential characteristics it provides vital access to the capital markets for lenders. Both in stressed and distressed market conditions the product benefits from a solid and international investor base. This enables banks to issue bonds with mid to long term maturities at relatively attractive funding costs and accordingly to provide the real economy with cost-efficient lending. As such over the years the Pfandbrief has become an essential tool in the financing of residential mortgages, commercial real estate and public sector debt. For investors Pfandbriefe have proven to be a low risk and liquid asset class. The fact that the covered bond industry recognizes that continual adaptation to the regulatory environment and evolution in the light of new market conditions is another key ingredient for the ‘old’ age and success of the Pfandbrief/covered bonds.
After the great success of the EU covered bond harmonisation file, what's next for Pfandbrief/Covered Bond issuers in the sphere?
Although the proposed EU Framework has been politically approved in the European Parliament at the end of April 2019 the work is not done yet. In contrary, the harmonization file is far from closed. The work for issuers has just started as the formal adoption is expected to take place towards the end of 2019. This means that at national level the framework will officially enter into force after 30 months after its final adoption at EU level. In that period regulators, lawyers, issuers and other stakeholders have to work together to implement the new directive and regulation in national legislation. Issuers have to amend their prospectuses, reporting, procedures etc. In this respect the ECBC is acting as a think-tank. We are continuously monitoring developments and stand ready to provide market insights and support to the legislative process at national level, and subsequently its market implementation. The ECBC has established an Implementation Task Force ready to support European member states and global stakeholders with market intelligence in implementing the new framework. Other important files for issuers are the establishment and further development of energy efficient mortgages and issuance of Green Covered Bonds and for part of the European lenders the creation of the European Secured Note (ESN). The ESN proposal is currently discussed at EU level and considers long-term financing solutions for small and medium sized enterprises and infrastructure projects replicating the best practices of covered bonds and securitizations.
If you could make a wish, what would it be say with 25 years sight, i.e. for the Pfandbrief's 275th anniversary in 2044?
For next 25 years I wish that the covered bond will continue to grow and that it will show the same or even better performance going forward at all market circumstances. I also hope that covered bonds continue to play a crucial role in the cost efficient financing of the real economy and households, not only in Europe but across the globe. It is my expectation that the new EU covered bond framework will provide a good foundation for that future growth.