250th anniversary of the Pfandbrief: Interview with Hans-Dieter Kemler

Hans-Dieter Kemler Member of the Board of Managing Directors, Landesbank Hessen-Thüringen (Helaba)

What role does the Pfandbrief play in the funding strategy at your bank?

Helaba is one of Germany’s leading Pfandbrief issuers. We are a universal bank with a focus on, amongst other things, commercial property finance and local government finance. The importance of public sector finance, particularly in the Federal State of Hesse, is highlighted by the close integration of WIBank in Heleba’s business model. Thus, Helaba will continue, as in the past, to maintain mortgage-backed cover pools and cover pools backed by public sector loans. This makes the Pfandbrief a vital funding source and a key pillar in our funding strategy. Moreover, the Pfandbrief is our most important benchmark instrument when it comes to marketing Heleba as an issuer vis-à-vis investors both in Germany and abroad. We were able to further strengthen our market position recently through the acquisition of Dexia Kommunalbank Deutschland.

Even 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?

Historically, the Pfandbrief has shown itself to be very stable in terms of price and rating, as it proved in particular during the last financial market crises. For this reason, the Pfandbrief is rightly considered by many market participants as a “government bond surrogate”. The regulatory assessment of Pfandbriefe likewise underscores this. The strength of the Pfandbrief is largely based on the soundness and the high quality requirements stipulated in the German Pfandbrief Act. This is also clearly demonstrated by the European harmonization of covered bonds, within the scope of which the stringent requirements that the German Pfandbrief meets are taken into consideration and reflected in the European context. Besides its consistency, the Pfandbrief has shown itself in the past to be very adaptable in its pursuit of the goal of safeguarding quality. The introduction of the liquidity buffer following the financial crisis and the recent success in ensuring the eligibility as cover of UK assets in the event of Brexit are just two examples.

These quality features have helped to secure for German Pfandbriefe a very high degree of acceptance among international investors. Thus, it may be expected that issuers who have to date not had to meet the high quality standards are also likely to enjoy broader investor acceptance in future under the new, rigorous legislation.

Speaking of harmonization: In addition to the “European covered bonds (premium)” segment, to which the Pfandbrief belongs, a kind of standard segment known as “European covered bonds” is also 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? Will it make your business more difficult or be a benefit to it?

As I have already mentioned, we welcome the integration of important elements of the Pfandbrief Act into the European harmonization. Already in the past, we have seen “niche” products that have applied Pfandbrief-like standards to other asset classes. And this makes sense, depending on the issuer’s business model. At the end of the day, the investors will decide whether and at what price “European covered bonds” are marketable. The funding strategy for our business model is built on our lending business being funded at largely matching maturities through the issuance of Pfandbriefe and unsecured issues. We therefore do not expect the segmentation under the harmonization to have any effect on our funding activities.

A new funding instrument has been available since August 2018, namely senior preferred bonds. Does this affect your funding strategies and if so, how?

Under the second revision of paragraph 46 (f) of the German Banking Act, German credit institutions have been able since July 23, 2018 – for the first time – to issue plain vanilla bonds, i.e. bonds without any structured features, in senior preferred format. This type of issue was once classified by law as belonging to the lower senior non-preferred category.

Plain vanilla issues are the funding instrument most commonly used by banks. For this reason, we welcome the fact that paragraph 46(f) has been revised, as it enables us to steer more precisely our funding measures with regard to pure funding (senior preferred) and (MREL) capital (senior-non preferred). Given our current, very large holdings of plain vanilla issues, our MREL capacity is assured for years to come, so that for us the senior preferred issue format is a welcome and much-used funding instrument.

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?

Sustainability is indeed a topic that we are paying close attention to. As a bank, we attach great importance to having a consistently sustainable business model. Our business strategy includes an explicit commitment to sustainability-oriented business activities, and we are committed to support climate protection. To demonstrate this undertaking both within our bank and outside it, we became a signatory to the Ten Principles of the UN Global Compact in 2017. In this way, the bank consciously accepts social and environmental responsibility. Our funding activities involve keeping a very close watch on new issuing trends, and we continuously evaluate their economic aspects. These, of course, also include “sustainable” issues, which are gradually gaining a foothold in the market as a new, additional funding alternative.