250th anniversary of the Pfandbrief: Interview with Marc Heß

Marc Heß Member of the Board of Managing Directors, Aareal Bank

After 250 years, the Pfandbrief does not seem to have lost any of its appeal. What do you consider to be its main selling point?

Stability. During this long period of 250 years, the legal requirements governing the Pfandbrief have regularly been brought into line with the changing environment and further enhanced. These were very often technical changes that further increased security for creditors and made lasting improvements to the Pfandbrief as a stable and safe form of investment. This makes it a very reliable funding instrument for banks. It has also enabled the Pfandbrief, time and again, to live up to its own high standard of stability during the crises the markets have experienced over the past 250 years.

Your bank operates in three continents in over 20 countries. How well suited is funding through the Pfandbrief in this respect?

Aareal Bank’s credit portfolio is geographically broadly diversified. We concentrate on high-quality financing for existing real estate; these are the best conditions, then, for funding through the Pfandbrief. With Pfandbrief-based funding, a haircut is applied to take the sustainable property values into account. We have mortgages from 17 countries in our cover pool which meet the relevant requirements. This means that investors can rely not only on high-quality mortgage loans but also on a geographical diversification of these loans which serve as collateral.

On the subject of harmonization: in addition to the segment “European covered bonds (premium)”, which includes the Pfandbrief, a kind of standard segment known as “European covered bonds” is to be introduced. These bonds meet the requirements of the EU’s covered bond harmonization directive, but are not eligible for privileged treatment. What is your view of the planned expansion?

We welcome, in principle, the introduction of a label for covered bonds, as it will provide a clear-cut answer to the question of what constitutes a covered bond and what does not. The introduction of the premium segment will give investors additional transparency with regard to the conformity of individual bonds with the CRR. Thanks, in particular, to the transparency requirements stipulated in Article 26 of the directive, investors will in future be able to make their decisions based on the information published by the supervisory authorities instead of themselves having to check the CRR conformity of bonds.
Of course, in parallel to the future covered bond labels, the “Pfandbrief” brand will continue to stand for the highest quality in the covered bond space. In this context, it will be important to ensure that this brand is not watered down, and that it continues to satisfy investors’ most stringent demands in terms of stability.

Sustainability is a topic that is attracting a great deal of attention on the capital market. Can you imagine your bank becoming active in the “green” or ESG bond segment?

Aareal Bank is a sustainable bank and receives good, and often above-average, ratings from many sustainability agencies. This is why the issuance of bonds which take account of ESG criteria will become important for us, too, going forward as soon as the preconditions – notably in terms of a uniform taxonomy – have been met. We expect to see standardization, not least because regulators are also focusing strongly on the combination of ESG and capital market. In the meantime, our sustainability team will keep a close watch on developments and prepare the necessary steps. For instance, we are already working on a major prerequisite, namely to further heighten transparency at the portfolio level with regard to sustainability and ESG.

Regulation, the economy or pressure to innovate – what are the foremost topics for you in terms of business policy in 2019?

The financial sector is currently faced with enormous challenges. We are looking at a mixture of stricter regulation, tough competition and economic problems along with a political setting that is increasingly more difficult to gauge and – in Europe, at least – a prolonged low interest rate environment. On top of this, there is the topic of digitalization, which presents both opportunities and challenges. Aareal Bank set the course for sustainable success back in 2016 with its forward-looking program “Aareal 2020”. Our strategy is aimed, in equal measure, at maintaining our traditional strengths and tapping new potential for growth, for instance by expanding the digital business of our IT subsidiary Aareon. But for all their much needed, future-oriented strategies, firms can only achieve lasting success if they permanently reassess their past decisions while reflecting on future actions, stay flexible in a fast-moving environment and adapt to changing realities and – not least – if they succeed in repeatedly generating a measurable value added for their customers.