The Pfandbrief 2011 | 2012

Quo vadis? The regulatory treatment of Pfandbriefe under Solvency II
Debt from EEA countries is currently privileged in the area of concentration risk, too. No
concentration risk as such is currently required to be calculated for this debt, regardless of
the actual concentration level. Concentration risk as set out in the standard model only exists
when a threshold representing the maximum acceptable percentage of a single debtor as part
of the overall investment is exceeded. The standard model does not include other forms of
concentration, such as geographic concentration or industry concentration, when calculating
the concentration risk.
The acceptable threshold generally depends on the rating of the security issued. A maximum
threshold of 15% per counterparty has been established for Pfandbriefe and other covered
bonds as set out in the UCITS directive, provided they have a rating of at least AA. If this
percentage is exceeded, QIS5 called for an additional capital requirement of 0.12% for each
additional percentage point by which the threshold is exceeded. The additional capital requirement
for Pfandbriefe with an A rating was 0.21%, for BBB-rated Pfandbriefe it was 0.27%
and for Pfandbriefe with an even worse rating it was 0.73%. As with the spread risk, this provides
privileged treatment for Pfandbriefe over other fixed-income securities, which only have
thresholds of 3% or 1.5% per issuer.
Summary and Outlook
42
Pfandbriefe are a particularly popular asset class for German insurance companies. Around
25% of their total investments were in this product group as at the end of 2010. Whether this
remains so or whether the investment behaviour of insurers will change depends partly on
the future regulatory capital requirements for insurers provided for under Solvency II. The delegated
acts and implementing acts, which must be approved before the expected start date of
Solvency II on 1 January 2013, will set out the specific form of the capital requirements.
The privileging of the Pfandbrief over unsecured corporate bonds and other interestbearing
instruments in the Solvency II standard model shown in the latest Europe-wide impact
study will play a major role in determining whether the German insurance industry can remain
a key investor group. However, the conditions for recognising this privilege are comparatively
high and have thus far not been rigorously implemented. This makes it questionable why it is
only AAA-ratings within the spread risk that enable Pfandbriefe to benefit from being privileged.
If the goal is dependency on ratings, it would make sense for this to correspond to the
regulation of the concentration risk and thus be extended to at least include AA-rated Pfandbriefe,
if not the entire investment-grade segment.
In spite of a hypothetical expansion of the proposed privilege of Pfandbriefe to include
other rating classes, these could become slightly less attractive in comparison to competing
asset classes. This applies in particular to insurers, which have to service very long-term