Covered Bonds - DG Hyp

DG HYP COVERED BONDS – PFANDBRIEFE – QUALITY THE PATH OUT OF THE CRISIS SPECIAL MAY 2009
Illustrative liquidity-gap calculation
Day Cover pool
cash flow
Pfandbrief
cash flow
Daily
variance
Cumulative
variance
1 50 0 50 50
2 100 50 50 100
3 80 0 80 180
4 50 100 -50 130
5 100 400 -300 -170
6 50 0 50 -120
7 80 0 80 -40
8 70 80 -10 -50
9 50 100 -50 -100
… 0 -100
… 0 -100
180 110 0 110 10
Source: DZ BANK
Our understanding of the approach for calculating the minimum necessary liquidity
requirement is that the bank determines each day’s variances (between cash inflows and
outflows) for a 180-day period, and adds these together to give the same number of
cumulative daily variances. The resulting biggest negative cumulative daily variance – only
the negative totals that stem from a cover shortfall present a risk that requires managing –
has to be remedied by cover and overcollateralisation in the form of ECB-eligible assets.
Our example shows a liquidity gap of EUR 170,000 on day 5.
Although the question of liquidity gaps caused by excessive maturity transformation in the
cover pool only becomes important when things get serious (the issuer-insolvency scenario
with subsequent separation of the cover pool), it is precisely this issue that not only the
rating agencies but also investors are zooming in on when rating and analysing covered
bonds and specifically pfandbriefe. This new regime has seen the legislators move a long
way in the direction of the permanent liquidity reserves that the rating agencies have called
for. In the present crisis situation however, even a 180-days cover period can be criticised
as inadequate seeing that a broad-based systemic crisis can never be definitely ruled out. In
this scenario however, absolutely strict cover matching would be the only way to guarantee
real security – and this requirement would be pretty difficult to impose on issuers (mainly,
but not solely, on cost considerations).
Cumulative daily variances
Absolute certainty is impossible to
guarantee in practice
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