250th anniversary of the Pfandbrief: Interview with Dr. Jörg Kukies

Dr. Jörg Kukies State Secretary at the Federal Ministry of Finance

What is the secret behind 250 years of the Pfandbrief?

The German Pfandbrief is important as a means for banks to obtain long-term funds on the capital market. Because of the stringent legal requirements it is subject to, it offers investors outstanding security and also proved itself during the financial crisis. This is why covered bonds, including Pfandbriefe, rightly benefit from extensive privileges in EU financial market regulation compared with uncovered senior bonds.

How can Pfandbriefe help to solve the housing or the climate crisis?

The double protection against issuer default makes Pfandbriefe a very low-risk asset class. This is reflected, amongst other things, in narrow spreads versus Bunds. This low level of risk leads to favorable refinancing costs for banks, which in turn means lower mortgage rates for borrowers. This provides incentives for more innovation in housing construction and thus the chance to counteract the housing shortage. Without doubt, green or sustainable Pfandbriefe can also contribute to environmental protection and sustainability. Germany has already seen a large number of successful issues of this kind. Our aim is to improve even further the integration of sustainability aspects into the decisions made by financial market players. This can be best achieved by concerted action at the EU level. For this reason, we actively support the development of an EU Green Bond Standard.

Looking ahead: What will be the benefit of the European harmonization of covered bonds? What can we expect of its transposition into German law, and when is it coming?

The covered bond markets within the EU are at very different stages of development. In some member states, such as Germany and Denmark, the markets are already very advanced, whereas other member states as yet have no legislation on covered bonds. Moreover, an EU-wide legal framework has created an incentive to make greater use of the advantages of this source of refinancing throughout Europe. In this sense, covered bonds could also – in the context of the capital markets union – play a stronger part in financing the real economy going forward. As a minimum harmonization instrument it, at the same time, leaves the tried and tested German Pfandbrief as an established product largely unaffected; it is also modeled, amongst other things, on the structures of Pfandbrief law. In the meantime, the Covered Bond Directive has been adopted by the EC Council of Ministers and, latterly, by the European Parliament. It is scheduled for publication in the Official Journal of the EU at the end of this year and provides for a transposition period of 18 months from the date it enters into effect. Germany will implement it punctually.