250th anniversary of the Pfandbrief: Interview with Dr. Stefan Hoops

Dr. Stefan Hoops Head of CIB Germany, Deutsche Bank AG

When did you have your first encounter with the Pfandbrief?

The Pfandbrief is one of the key financial market instruments for refinancing and an indispensable investment instrument. Although Deutsche Bank itself did not apply for a license to issue Pfandbriefe until 2009, we are very well acquainted with the Pfandbrief and its key role. 

In your view – what is the recipe for the success of the Pfandbrief’s 250-year history?

The recipe for its success is the stringent legal framework, which gives investors a high degree of security. This high degree of security, in turn, means lower funding costs for issuers – and that makes the Pfandbrief very interesting for banks as well.
Pfandbriefe are used almost exclusively to refinance loans to the public sector and real estate finance, which makes the Pfandbrief a product of tremendous economic importance. And that justifies the preferential treatment afforded to Pfandbrief creditors over other creditors in the event of an issuing bank’s insolvency. Thus, the sometimes criticized inequality in insolvency proceedings can be readily explained by the particular importance that the financed sectors have for society as a whole. 

What needs to be done to make the harmonization of covered bonds in Europe a success story?

For harmonization in Europe to become a success, it is important that the EU directive sufficiently takes national particularities into consideration. The advantages the Pfandbrief today offers, such as the very strict regulation on the determination of the mortgage lending value in German Pfandbrief legislation, must be preserved. At the same time, the limits imposed on cover assets also need to be maintained going forward. This will ensure that the preferential treatment for Pfandbrief creditors continues to be accepted. Seen from this perspective, the European Parliament’s proposal of a so-called premium covered bond, which would enjoy special legal privileges, is headed in the right direction.

How can the Pfandbrief retain its position as benchmark in the covered bond market?

Besides the fundamental strength of the real estate loans and public sector loans which serve as underlying cover assets, the Pfandbrief’s benchmark role is founded, above all, on the strength of the legal framework and on national supervision. That’s why it is essential that these advantages are preserved in the future. It is important that the new EU covered bond label should not crowd out the successful Pfandbrief product. It is our understanding that the proposals of the EU Commission, the EU Council of Ministers and the EU Parliament will ensure that this is the case.