250th anniversary of the Pfandbrief: Interview with Lisa Paus
What is the secret behind 250 years of Pfandbrief history?
The beauty of a Pfandbrief is that everyone knows what they've got. This is what distinguishes the Pfandbrief from other securitisation positions such as ABS, MBS, etc., which had been under fire during the financial crisis. It's also due to the clear and relatively simple legal framework. This clearly regulates how a Pfandbrief is to be structured, which assets must be used to back it and how the assets are valued.
This creates confidence in the Pfandbrief as a product and ensures a high level of stability. In addition, the structure of Pfandbriefe avoids major incentive problems in lending: while the risk of a borrower defaulting is passed on in conventional securitisation positions, the lending bank itself is responsible for any losses resulting from Pfandbriefe. Consequently, it has a vested interest in granting loans only after it has conducted a thorough check.
The Pfandbrief thus offers investors a safe investment opportunity, while providing banks with a method to obtain funding on a long-term basis.
What needs to be done to ensure that the Pfandbrief remains a successful product going forward?
Due to its structure and its long and successful history, the Pfandbrief rightly enjoys a high degree of trust among investors. Yet during the financial crisis, it seems that some Pfandbrief banks almost gambled away this trust. This is because, unlike the Pfandbrief itself, not all Pfandbrief banks were rock solid. Prior to the crisis, some banks countered their structural problems by adopting riskier investment strategies: they expanded their business enormously on the basis of very low capital buffers. Capital ratios of only 2% were not unusual for some banks. Depfa Bank, a subsidiary of Hypo Real Estate, even operated with a leverage of 125 – a capital ratio of only 0.8%. When problems arose during the crisis, taxpayers then had to rescue the bank. As a result, some banks could almost have destroyed the good reputation of the Pfandbrief. In future, there must be no more escapades of this type. That is why we need, for Pfandbrief banks and all other banks, what we already have for Pfandbriefe: simple, clear and fixed rules instead of highly complex but often ineffective sets of rules.
What potential do you see in the "Green Pfandbrief", and what potential side effects?
More and more investors are no longer satisfied with just generating returns. They want to know what effect their investment is having, while also ensuring that their money is not being used to destroy our environment or jeopardise social cohesion. The market potential for sustainable products and especially for Pfandbriefe is accordingly large.
There is still a lot to do in terms of sustainability, especially in the property sector: after all, 63% of all Pfandbriefe in circulation are used for real estate financing. European Commission figures indicate that buildings account for 40% of energy consumption and 36% of CO2 emissions in the EU. To be in with a chance of meeting the 2-degree target, the stock of real estate must be extensively renovated. In addition, the demand for affordable housing in cities has increased enormously. There is a lot of potential for socially and ecologically sustainable Pfandbriefe in this area. That's why I'm pleased that some Pfandbrief banks have been making placements in this segment since 2015 and that the outstanding volume has now risen to more than EUR 5 billion. At just under 1.5% of all outstanding Pfandbriefe, however, it represents only a niche market. This proportion must be increased further.