The Pfandbrief 2011 | 2012

Counterparty default risk
Mortgage loans are closely related to Mortgage Pfandbriefe and are thus frequently regarded
as a substitute. However, the resulting capital requirements under QIS5 were not necessarily
identical. In contrast to Pfandbriefe, mortgage loans were allocated to counterparty default
risk. The calculation of the capital requirement in this category does not depend directly on the
creditworthiness of the borrower or on the term of the mortgage loan. Instead, it is based on
the relationship between the market value of the security provided (i.e. the property) and the
market value of the loan. The capital requirement for a loan that is fully covered by collateral
is around 4% (cf. figure 3). This level is roughly comparable to the capital requirement for a
AAA-rated Pfandbrief designed as a zero-coupon bond with a seven-year maturity. This would
render unfounded the concerns sometimes expressed that Solvency II creates significant competitive
advantages for mortgage loans over Pfandbriefe. However, this concern remains valid
if one takes into account the fact that the large majority of the Pfandbriefe currently issued
have maturities of six to eight years.
Fig. 3:
Counterparty default risk
Counterparty default risk: Capital requirement as percentage of
mortgage loan on market value basis
16%
14%
12%
10%
8%
6%
4%
0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 130%
Ratio: Market value of security (property) / market value of loan
41
However, since the interest rate risk will in future give insurers incentives to increase duration
on the asset side depending on the maturity of their technical liabilities, the above statement
is disputable. This is because duration is ignored in the calculation of counterparty default risk
in the Solvency II standard model. As a consequence, the creation or building up of a portfolio
with long-term mortgage loans gives insurers the opportunity to minimise the capital requirement
for interest rate risk without being punished elsewhere. However, increasing the level of
duration within a Pfandbrief portfolio would result in an additional capital requirement in the
spread risk. Investment in long-term government debt from the EEA offers a more favourable
solution. Such investments are subject to no additional costs – neither from the spread risk nor
from the counterparty default risk – beyond the capital requirements of the interest rate risk.