Covered Bonds - DG Hyp

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DG HYP COVERED BONDS – PFANDBRIEFE – QUALITY THE PATH OUT OF THE CRISIS SPECIAL MAY 2009 mortgage, ship or aircraft pfandbriefe. The share of substitute cover for public sector pfandbriefe is limited to 10% of the volume of public sector pfandbriefe outstanding. The PfandBG has harmonised the geographical restrictions on ordinary cover assets for mortgage and public sector pfandbriefe. In addition to the European Union (EU) and European Economic Area (EEA) states and Switzerland, claims on the USA, Canada and Japan are now defined as eligible cover assets for public sector and mortgage pfandbriefe. Claims on borrowers in non-EU member states in which the priority rights of the pfandbrief creditors are not recognised in the event of insolvency, may not exceed 10% of the total cover pool assets (10% limit). The privileged treatment of pfandbrief creditors (priority in bankruptcy) is deemed to be securely recognised in all EU member states, so the aforementioned 10% ceiling does not apply to borrowers from the EU. Overview of ordinary cover assets for public sector pfandbriefe Permissible cover assets: claims against... Domesti c 1 Central and local governments: federal government, Länder, cities and municipalities, local authority associations (provided risk weighting does not exceed 20%). 2 Public-sector special purpose institutions 3 Public law special funds (such as for example the former Bundesbahn or Bundespost) 4 Religious bodies (provided they are recognised as public entities). 5 Social insurance institutions 6 Public sector credit institutions or insurers (however only liabilities subject to guarantee obligation/grandfathering) 7 Public sector institutions or trusts legally entitled to raise fees, rates or other levies. Foreign 8 Central and local governments from the European Union (EU), European Economic Area (EEA), Japan, Canada, Switzerland and USA (provided risk weighting does not exceed 20%). 9 European states not listed under 8 that are members of the Organization for Economic Cooperation and Development (OECD) 10 Supranational institutions: European Investment Bank (EIB), International Bank for Reconstruction and Development (IBRD), Development Bank of the European Council (CEB), European Bank for Reconstruction and Development (EBRD) Source: PfandBG Special requirements for public sector pfandbriefe The potential cover assets for public sector pfandbriefe in the revised Pfandbrief Banks Act are largely in line with the provisions of the HBG and are listed in the table above. The PfandBG clearly states that claims on domestic public law entities can only be used as cover for public sector pfandbriefe provided they benefit from the principles of maintenance obligation (Anstaltslast) and guarantee obligation (Gewährträgerhaftung) or an explicit central or local government guarantee. Examples are claims on public development banks such as Kreditanstalt für Wiederaufbau (KfW) or NRW Bank. Bonds and cash claims on German Landesbanken whose bonds are grandfathered by means of the guarantee obligation continue to qualify as cover assets for public sector pfandbrief cover pools. Claims on Landesbanken originating after 19 July 2005 are no longer eligible as ordinary cover for public sector pfandbriefe due to the abolition of the guarantee obligation. Geographical restrictions harmonised "10% ceiling" Ordinary cover 20
DG HYP COVERED BONDS – PFANDBRIEFE – QUALITY THE PATH OUT OF THE CRISIS SPECIAL MAY 2009 Special requirements for mortgage pfandbriefe The regulations now governing the ordinary cover assets for mortgage pfandbriefe are largely identical to the provisions of the HGB. Only mortgage loans that meet certain requirements are eligible as cover assets. Hence the mortgages must encumber properties, rights equivalent to real property or such rights under a foreign legal system that are comparable with the rights equivalent to real property under German law. A duty of insurance and an obligation to calculate lendable values also place additional requirements on mortgage loans. Only the long-term, sustainable net asset value and capitalised earnings of a property can be taken into consideration when determining its lendable value. According to the PfandBG, mortgage loans used as cover for mortgage pfandbriefe may not exceed 60% of the lendable value of a property. This limit applies regardless of whether the building is used for residential or commercial purposes. This regulation, which serves to protect pfandbrief creditors, is very strict compared with other European covered bond regimes. Please refer to the appendix of this study for further information on the calculation of lendable values. Breakdown of cover assets *) 60% loan-to-value ceiling Additional cover (substitute cover) max. 20% Ordinary cover min. 80% Source: DZ BANK; *) in % of the volume of mortgage pfandbriefe outstanding Special requirements for ship pfandbriefe Only loans that are secured by ship mortgages qualify as ordinary cover for ship pfandbriefe. The loan is limited to ships and to ships under construction which are recorded in a public register. The loans may not extend beyond the 20 th year of the ship’s life. The supervisory authority may allow exceptions in individual cases. Loans secured by ships or ships under construction, which are registered abroad, can also be included in the cover pool provided certain provisions that are defined in the PfandBG are met. 120 100 80 60 40 20 0 Ordinary cover 60% loan‐to‐value ceiling Market value LTV LTV limit (60%) Ordinary cover 21
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Covered Bonds - DG Hyp

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