250th anniversary of the Pfandbrief: Interview with Holger Wessling

Holger Wessling Member of the Board of Managing Directors, apoBank

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

Since 2008, the bank has regularly issued mortgage Pfandbriefe, both in benchmark format and as private placements. Since then, we have expanded Pfandbriefe to make them our most important source of capital market funding. They are therefore very important for apoBank’s funding strategy. They secure attractive funding levels with a volume of approximately 5 billion euros, and so make a valuable contribution to implementing our growth strategy. They also facilitate maturity matching in balance sheet management on the basis of steadily growing, short-dated customer deposits.

The Pfandbrief does not seem to have lost any of its appeal 250 years later. What is its greatest virtue in your opinion?

The Pfandbrief has been resistant to crisis over the long term. It benefits from conservative legislation that supports high-quality cover assets as well as promoting security and sustainability. Investors therefore place their trust in them and they provide a stable investment. At the same time, the traditional Pfandbrief product is being continuously developed in order to satisfy investors’ requirements and to take account of changing conditions and trends.

Do you see the Pfandbrief’s benchmark position being endangered through the harmonisation of covered bonds in Europe?

No, harmonisation of the legal framework for covered bonds and the creation of higher quality standards in Europe should in fact further strengthen the Pfandbrief’s special position. The current - sometimes considerable - heterogeneity of national regulations for covered bonds has endangered its special regulatory status up to now. From our perspective, improved comparability of European covered bonds can help to safeguard this status, make the product even more crisis-proof and further strengthen investor confidence in the process.

Expansionary monetary policy has strongly influenced the Pfandbrief market over the past 10 years, with both positive and negative effects. What is your assessment of the current situation?

Pfandbriefe represent the second largest asset in the ECB purchase programme with a volume of around 260 billion euros. Although holdings remained steady following the end of the third covered bond purchase programme, central banks are still the key players in the primary and secondary market. This high demand from the ECB led to considerable market distortion. A significant number of commercial investors were squeezed out of the market, such as insurers, asset managers and banks. In addition, market liquidity and returns declined.

Currently, outstanding volumes are stabilising and new issues remain at a high level. We have also seen returns rising again since May 2018. As risk and reward profiles improve, new opportunities are emerging for investors and so many are returning to the market. As a result, differences in quality between the individual covered bond markets are becoming more important again.

In your opinion, which trend currently exerts more pressure to innovate on the capital market: sustainability or digitalisation?

Digitalisation is clearly the more significant driver - in many respects. On the one hand, increasing digitalisation means that customers are placing growing demands on their banks because they want new services. In terms of banks’ internal processes, digitalisation means time and money: greater efficiency with falling costs. On the other hand, the steady increase in supervisory reporting requirements presents banks with the challenge of investing in new, more efficient technical solutions, such as blockchain/distributed ledger technology (DLT). Banks will have to completely digitalise their processes on an end-to-end basis, otherwise they will lose their competitive edge.

Having said that, the topic of sustainability in finance has become much more important in the last few years, not least because of the CSR reporting requirements for credit institutions that came into force last year. Not only is there a growing trend among issuers and investors to direct more capital into sustainable investments, but investors are also increasingly looking to engage with the representatives of their investments on the subject of their sustainability strategies. This places greater pressure on companies to be proactive.

Fresh impetus should come from the EU regulatory framework announced regarding the classification of sustainable assets. The creation of standards and the drafting of regulations will be crucial for the further growth of the ESG Pfandbrief segment.