250th anniversary of the Pfandbrief: Interview with Dr. Christian Ricken

Dr. Christian Ricken Member of the Board of Managing Directors, Landesbank Baden-Württemberg (LBBW)

What part does the Pfandbrief play in the funding strategy of your bank?

The Pfandbrief is a key component of LBBW’s funding strategy. The fact that more than one-quarter of our total capital market funding in the 2018 business year was accounted for by issuing Pfandbriefe underscores this point. Above all in difficult market phases, the Pfandbrief is especially well-suited – thanks to its outstanding safety features – to provide issuers with the liquidity they need on the one hand, and to offer investors a safe product for their investments on the other. What is more, the Pfandbrief is a funding instrument with which it is possible to reach German and international investors alike.

Even after 250 years, the Pfandbrief does not seem to have lost any of its appeal. What do you think is its main selling point?

Seen from the investors’ perspective, the Pfandbrief is a tremendously safe product. Each issue is covered by a selection of assets which are recorded in the so-called cover register, making them identifiable. The maintenance of this cover register is governed by strict legal regulations, adherence to which is watched over by an independent cover pool monitor. Investors enjoy additional protection in that the cover register is ringfenced in the event of the bank becoming insolvent. And this pays off: never in its 250-year history has a Pfandbrief not been repaid.

The Pfandbrief is just as attractive for issuers, as the many assets serving as collateral mean that Pfandbriefe can be issued at low, very favorable funding costs. A further advantage of the Pfandbrief is that it can usually be issued in difficult market phases, whereas other funding instruments in the primary market may no longer have the necessary market depth.

Going forward, what will it take for the Pfandbrief to defend its benchmark status in terms of quality in the European covered bond market?

The German Pfandbrief stands for reliable quality and stability. For this to remain the case, also in the European/international covered bond market, it will be crucial to have a close interplay of sound issuers, a stable German real estate market and clear-cut supervisory framework conditions in order to ensure a high degree of stability. Incidentally, the activities of the Association of German Pfandbrief Banks (vdp) are also extremely important in this respect, as the vdp gives members and issuers valuable support in specialist questions, identifies political discussions early on, and provides new stimuli (e.g. in the field of green bonds).

By the way, one of the vdp’s focal themes, namely the continuous enhancement of the German Pfandbrief Act, is also of outstanding importance in enabling the Pfandbrief to retain its benchmark position. The German legal framework is particularly tightly drawn and leaves very little scope for deviations from the existing aspiration and quality level – one reason why many elements of the Pfandbrief Act serve as the foundation of the current covered bond harmonization package. For all our efforts to retain the Pfandbrief’s standard of quality, we must not fail to see the signs of the times. This is especially true with regard to the opportunities offered by digitalization, which might present themselves along the entire value chain of the Pfandbrief. We must keep our eyes open in this respect, particularly at the vdp level, to make the Pfandbrief fit for the digital world of tomorrow.

Sustainability is a topic that is attracting a great deal of attention on the capital market. Your bank made its debut in the ESG segment of the covered bond market in 2018. How much effort is involved when a bank positions itself as a new issuer?

For years now, LBBW has concerned itself with the topic of sustainability, and is very active in the ESG segment. In 2017, the first green unsecured bond was issued that was based on a specially developed “green bond framework”. The preparatory work for this program, which included analyzing green assets and obtaining necessary expert opinions, took a total of four months, a relatively short period of time. This important preparatory work and this experience stood us in good stead when we issued our inaugural green Pfandbrief in June 2018. Thus, the effort involved for LBBW was manageable. We have expanded our green bond portfolio considerably this year, and in May 2019 we issued the world’s first green Pfandbrief in US dollar. The large, internationally diversified order book shows the strong interest investors have in the ESG segment.

The market for green Pfandbriefe is still in its infancy, with the result that the product is sometimes defined in different ways. Would more standardization, brought about possibly through legal regulations, benefit or hold back the market at the present point in time?

Minimum standards in the area of green Pfandbriefe do make sense as a means of bringing about more transparency and binding quality requirements both for investors and for issuers. Furthermore, uniform standards that are accepted by issuers and investors help the very interesting market for green Pfandbriefe and green funding in general to keep growing. In addition, greater standardization can lead to major cost savings, for instance in reporting. This point is important, given that so far the additional costs that arise cannot competitively be passed on to investors via a pricing difference compared with traditional funding through Pfandbriefe.

On the other hand, rising standardization needs to offer sufficient scope for different market conditions and national quality requirements, for example when selecting green assets. These can vary from one country to the next. National particularities should therefore, as with the harmonization of covered bonds, be adequately taken into consideration.