The Preferential Regulatory Treatment of the German Pfandbrief

RA Peter Scherer, LL.M. (I.U.), GSK Stockmann + Kollegen

The legal profession understands the concept of “preferential treatment” as being a justified, positive exemption from the rule of equal treatment. We all know that apples and oranges both are fruit, but they are different things and cannot be compared. And one shouldn't use oranges if your recipe is for apple pie. Similarly, a Pfandbrief is a security instrument and a specific form of “covered bond”, but there are various good or even imperative reasons for treating it differently than other securities in legal terms. This article dis-cusses the preferential regulatory treatment of the German Pfandbrief in this sense.

Good or even imperative reasons? Notably, the German Pfandbrief has been around for almost 250 years. As its structure is defined by statute, the Pfandbrief comes with a high level of security, especially with the highest possible degree of insolvency remoteness, a verifiable valuation of its cover assets, robust revenues and liquid trading markets with little market volatility, all making it the primary funding tool in the German banking sector, writing a true story of success. There has never ever been a Pfandbrief crunch, neither in the two world wars nor in the most recent crises, meaning the global financial markets crisis and the European public finances crisis. These facts not only make the Pfandbrief attractive to investors but also allow legislators and regulators to treat the Pfandbrief differently than other securities, at least in part.