Amendment to Pfandbrief Act strengthens investor protection

Berlin, July 6, 2022

European directive implemented in full – Pfandbriefe retain privileged risk weighting

The changes to the German Pfandbrief Act (Pfandbriefgesetz, PfandBG) entering into force on 8 July 2022 have been welcomed by the Association of German Pfandbrief Banks (vdp). New rules on over-collateralisation and new protection of designations in Europe are some of the provisions that are being introduced. Transparency requirements for Pfandbriefe are also being extended substantially. Focus topics include key figures relating to outstanding amounts, over-collateralisation, maturity deferral, liquidity risk, cover derivatives and other cover assets. 

"The amendments will strengthen the protection for Pfandbrief investors even further. This will ensure the quality leadership of Pfandbriefe within the covered bond product segment," said vdp Chief Executive Officer Jens Tolckmitt, welcoming the amendment to the Pfandbrief Act.

The amendment to the Act will fully implement the provisions of the European Covered Bond Directive and Article 129 of the Capital Requirements Regulation (CRR) in Germany. 

One of the many changes to the Act is that the existing statutory over-collateralisation of 2%, based on net present value, is supplemented for the first time by nominal statutory over-collateralisation (2% for Mortgage Pfandbriefe and Public Pfandbriefe, 5% for Ship Pfandbriefe and Aircraft Pfandbriefe). In addition, receivables from banks will only be accepted as cover if an external rating is available, and they do not originate from the same banking group. 

Although the publication of information on over-collateralisation is already standard practice, the relevant key figures have so far not been part of Section 28 of the Pfandbrief Act. It will be mandatory in future to provide disclosures on total over-collateralisation. The amounts of statutory, contractual and voluntary over-collateralisation must also be disclosed, in each case separately. They must be published by the banks as nominal value, net present value and risk-adjusted net present value. 

The vdp's member institutions have agreed on a consistent understanding of the new requirements, thus ensuring that the information remains comparable. The transparency disclosures under the new rules must be published by the Pfandbrief banks for the first time in the third quarter of 2022, with the previous year's data for most new key figures published for the first time starting from the third quarter of 2023. All important information, including lists itemising the transparency disclosures by member institutions, is available to investors and analysts on the vdp website. 

Pfandbriefe issued prior to 8 July 2022 retain privileged risk weighting

The term "European Covered Bond", with and without the term "Premium", is being introduced to protect designations in Europe. Whether or not to communicate the designation is at the issuers' discretion. The addition of "Premium" shows that the requirements laid down in Article 129 of Europe's Capital Requirements Regulation (CRR) have been met, indicating a particularly high level of recognised quality. The supplementary term "Premium" applies to all Mortgage Pfandbriefe, Public Pfandbriefe and Ship Pfandbriefe issued from 8 July 2022 onwards. 

At a later stage, BaFin (Germany's Federal Financial Supervisory Authority) will publish a list of all Pfandbrief banks and their Pfandbrief categories, indicating the Pfandbrief bank's categories in circulation for which the designations may be used. Although none of the Pfandbriefe issued before 8 July 2022 may use the designations "European Covered Bond" and "European Covered Bond (Premium)", they do continue to meet the requirements of privileged risk weighting as laid down in Article 129 of the CRR. BaFin will publish a notification to this effect on its website.