250th anniversary of the Pfandbrief: Interview with Felix Hufeld
When did you first come across the Pfandbrief?
As a student, when I was reading law.
Seen from the perspective of a supervisor, what is the secret behind the success of the Pfandbrief’s 250-year history?
Speaking of the time since the German Mortgage Act came into force – almost 120 years ago, now -, and which was superseded by the Pfandbrief Act in 2005, I would say the strict regulations on cover eligibility and on the prudent (today, we would use the word “sustainable”) determination of the mortgage lending value. To this I would add the fact that supervisors also carry out cover checks themselves. Moreover, we always try to ensure that comprehensive rules are in place for the worst case scenario: the insolvency of a Pfandbrief bank. But we should not overlook the part played by deposit insurance schemes that are ready and able to step in, for on multiple occasions in the past they have had to come to the aid of issuers that had got into difficulties through their business that was not eligible for cover operations.
How important is the Pfandbrief to financial stability?
The Pfandbrief is generally perceived as a safe haven and as a real alternative to central government debt. Because it can be issued to obtain long-term liquidity, the Pfandbrief facilitates the granting of longer-term loans, also where the conditions are concerned. This helps stabilize the real economy where it is financed in this way. This effect that the Pfandbrief has, i.e. of countering outflows of liquidity and interest rate fluctuations, is perhaps not recognized to such an extent in prolonged phases of abundant liquidity and low interest rates. But if the banking industry were again to experience a confidence crisis, the Pfandbrief in particular could act as an anchor of stability.
On the other hand, if the Pfandbrief were to come under pressure in such a situation, there would possibly be a danger of an extensive and lasting loss of confidence. The Pfandbrief is a private sector financial instrument of considerable importance – not just in terms of national financial stability. For it to be able to continue to perform this role, Pfandbrief banks, regulators and supervisors must be aware of, and unerringly fulfil, their responsibility.
What can the Pfandbrief do to hold on to its benchmark role in the covered bond market?
The technical requirements for a benchmark role – that is, for issues of at least €500 million – are big issuers and functioning mechanisms which enable the assembly of the cover pools needed for benchmark issues. The Pfandbrief scores on both counts. In conceptual terms, regulation should not end with the economic withdrawal of an issuer. Instead, it has to offer a robust framework for the settlement of a Pfandbrief cover pool. This should be done in a way that is implementable. After all, in the European context, too, a healthy balance should always be maintained between the Union’s objectives like the capital markets union on the one hand and the existing national particularities on the other.