Covered Bonds - DG Hyp

DG HYP COVERED BONDS – PFANDBRIEFE – QUALITY THE PATH OUT OF THE CRISIS SPECIAL MAY 2009
government sector is just too lucrative, albeit in phases. All the same, they will probably
write less business and their strategic decision-making will be based even more on
opportunistic considerations than it has been in the past. When making investment
decisions, investors will focus much more closely in future on the pfandbrief issuers‘
interest-rate and funding risk, which leads us to predict that maturity transformation will
generate less income in future. The view from here is that banks that focus exclusively on
state finance, such as Hypothekenbank in Essen (now part of Eurohypo), will soon be
history. This business model is unlikely to be acceptable to the market in future since localauthority
lending is a low-margin business where players are exceptionally dependent on
maturity transformation and are therefore inevitably exposed to interest-rate-change risk.
We should also state in conclusion that despite the crises that are roiling a whole series of
property markets, property finance has not reached the end of the road. The banks active in
this business segment will adapt their business models to incorporate the lessons they have
learned from the financial crisis so far. Their responses will lead them to focus even more
on the key themes of risk-responsive margins, adequate capitalisation, liquidity security, and
macroeconomic crisis diagnosis. However, we would interpret these changes as fine-tuning
of their business models rather than a wholesale switch to a new business strategy. They
will behave even more opportunistically in the state-finance business line than now, but they
will be lending less in the foreseeable future even as government borrowing swells in
response to the crisis.
Evolution not revolution in business
models
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