250th anniversary of the Pfandbrief: Interview with Jean-Claude Juncker
When did you first hear about Pfandbriefe?
It was certainly half my lifetime ago, though not quite 250 years – I’m pretty sure about that. Exactly 30 years ago, in 1989, I was appointed Minister of Finance of Luxembourg for the first time, an office I held for 20 years. What is more, for almost just as long I was, as you know, Prime Minister of my native country, where we know a thing or two about finance. I am pleased to be able to congratulate the Pfandbrief on its 250th anniversary.
How did a financial product from Germany advance to become one of the country’s leading exports?
Germany being an export nation, that of course is no coincidence. But seriously – it was Frederick the Great who secured a location advantage for Germany with a “cabinet order” back in 1769 by laying down the first regulations on the issuance of Pfandbriefe. This enabled the doubly-secured bond to become established in Germany before markets for this instrument could emerge in other European countries. A sound legal framework is crucial in order to protect not just investors but issuers as well. Many EU member states have had legal frameworks of their own in place for quite some time, now, which has given developments a further boost. And finally, the size and liquidity of the covered bond market as a whole seem to me to play an important role in their success. At the end of 2017, the volume outstanding of covered bonds worldwide totaled €2.5 trillion, of which €2.1 trillion was accounted for by euro-denominated paper issued by EU institutions. This gives the European market an 84% share of the global market volume.
Why is the harmonization of covered bonds a success story?
Covered bonds have proved themselves to be a reliable and stable form of financing, particularly during the financial crisis. The German Pfandbrief market functions well, but important covered bond markets have also been set up in Denmark, France, Spain, Sweden and Italy. Having their own, sound legal framework for this bond type was part of the success, but so were the specific programs launched by the European Central Bank, which made it easier to fund the financial system through Pfandbriefe and other covered bonds. But at the same time, the potential of these instruments was restricted, because the member states often still have different regulations. And it is also true that covered bonds have so far not played a big part in some EU member states. That is why the European Commission, in March of last year, proposed common definitions and standards for covered bonds as part of one of my priorities, namely to build a capital markets union in the EU. Through it, we would like to offer investors more choice and help give businesses better access to capital across national borders – and, in this way, further strengthen our financial system as a whole. I very much hope that the European Parliament and the Council will get this important reform finalized before the European elections.