The Pfandbrief Roundtable 2016

The Covered
Bond Report
The
Pfandbrief
Roundtable
2016
www.coveredbondreport.com September 2016
Pfandbrief_Roundtable_2016_Cover_vdp_1.indd 1 05/09/2016 16:20:53

2 The Covered Bond Report September 2016
SPONSORED FEATURE: THE PFANDBRIEF ROUNDTABLE 2016
Neil Day, The Covered Bond Report: How has Pfandbrief
supply developed this year?
Sascha Kullig, vdp: Based on Bundesbank figures, the outstand-
ing volume of Pfandbriefe at the end of the first quarter was almost
as high as at the end of 2015, slightly above Eu380bn. The same
applies to the volume of issuance: according to the Bundesbank
figures, we had around Eu12bn of mortgage Pfandbriefe issued
and Eu4.1bn of public sector Pfandbriefe.
We also conduct a monthly survey of our members and, ac-
cording to this, issuance from January to May of public sector
Pfandbriefe was Eu4.8bn, a decrease of almost 30% compared to
the same period last year. However, member banks issued almost
Eu18bn of mortgage Pfandbriefe, an increase of 12%.
Based on vdp members’ forecast, we expect issuance of around
Eu57bn for the whole year, Eu43bn-Eu44bn of mortgage Pfand-
briefe and Eu13bn of public sector Pfandbriefe. Taking into ac-
count the redemptions of around Eu30bn for mortgage Pfand-
briefe and almost the same for public sector Pfandbriefe, we expect
negative net supply of around Eu2bn for the whole year. This is
subject to circumstances, namely Brexit, and TLTRO II.
Day, The CBR: How does that compare with the overall
covered bond market?
Alexandra Schadow, LBBW: From January to mid-June we had
Eu91bn of euro benchmark covered bonds coming into the over-
all market. The leading country was France, followed by Germany
with Eu16.5bn, and Spain was third.
Kullig, vdp: German banks nevertheless issued the most bench-
marks, although given a smaller size of Eu500m, the aggregate vol-
ume was lower than France.
Schadow, LBBW: And only marginally lower: France was
Eu16.8bn and Germany Eu16.5bn.
Day, The CBR: The development of outstandings and
issuance of Pfandbriefe therefore appears quite stable,
according to the ﬁgures Sascha cited.
Kullig, vdp: The outstanding volume of Pfandbriefe has been
decreasing over the years and we have been saying for some time
now that we expect to reach a bottom. We had expected to reach
the bottom this year, but, as I mentioned, given the circumstanc-
es and some volatility we might see a lower outstanding volume
again this year.
And it is worth highlighting that already last year we had a
higher outstanding volume of mortgage Pfandbriefe than public
sector Pfandbriefe for the first time since I have been in the market,
at least.
Claudia Bärdges-Koch, MünchenerHyp: From an issuer’s
perspective, what has been impossible to ignore has been the shift
in volumes from private placements to benchmarks, to public
deals. That has been very apparent to us. According to our first half
figures, private placements were just less than half of what we did
in the same period last year, so far less private placement business.
Andreas Wein, LBBW: Our experience has been exactly the
same. Does that apply to all the issuers here?
Bodo Winkler, Berlin Hyp: Yes, more or less. We have done
Eu1.5bn so far and out of this Eu1bn was benchmarks. And one of
the non-benchmarks was a syndicated deal of more than Eu300m
that we did to be able to issue something longer, so it absolutely
reflects the trend. This pure private placement market that we ex-
perienced in past years simply does not exist anymore.
Tobias Engel, Aareal Bank: I can only answer this from, let’s
say, a research perspective because we didn’t issue so much Pfand-
briefe this year, but all our discussions with investors reflected the
fact that due to the low interest rate environment the typical long
The Pfandbrief
Roundtable 2016
The Covered Bond Report brought together leading issuers, investors and others in
July for a roundtable — hosted in Stuttgart by LBBW and sponsored by the Association
of German Pfandbrief Banks (vdp) — to discuss the big issues facing the market, such
as the unprecedented yield situation, and regulatory and structuring developments.
Pfandbrief_Roundtable_2016_8.indd 2 05/09/2016 16:04:25

September 2016 The Covered Bond Report 3
term Pfandbrief investors, like insurance companies, don’t buy
anything, or more or less anything with the usual 10 to 20 year
maturity. The main investor base therefore currently comes from
bank treasuries and from the ECB, and they clearly prefer bench-
marks. So we see this clear shift.
Day, The CBR: Tobias, why have you not been doing very
much overall, as you mentioned?
Engel, Aareal: The reason is quite specific to Aareal: we did two
acquisitions in recent years, Corealcredit and WestImmo, and in
the past 18 months to two years we have been fully engaged in the
integration process. We are quite actively reducing the non-core
assets of these two companies, and both were very well funded,
with liabilities that were longer than the outstanding assets, so we
have been generating a liquidity surplus without issuing anything.
That’s the main reason why we have been quite shy in issuing
Pfandbriefe in the last months.
Day, The CBR: Is that going to change soon, or will it be
still some time before you are more visible in the market?
Engel, Aareal: The non-core asset portfolio is not at the level that
we plan for the future — we will still reduce the portfolio by some
billions more — but we also have several maturities in the coming
months. I can’t fully predict how fast we will reduce our non-core
assets — I have the sense that in recent months we have been a
little bit more successful than we planned — so it’s very difficult to
predict if we will issue soon. But at the latest, next year we will be
in a situation where we can issue further benchmarks.
Day, The CBR: LBBW has been quite active in benchmarks
this year. Is there any particular reason you have been
more active? And how have you found the market?
Wein, LBBW: This is partly down to the shift away from pri-
vate placements to public benchmark format. That is something
that we saw already last year, when we ended up doing more in
benchmark format than we had originally anticipated. We expect
roughly the same numbers to also apply for 2016, because again
this year, as Claudia mentioned, the private placement market
isn’t that deep.
We have had a very good start to the year. We were first out of
Roundtable participants:
Claudia Bärdges-Koch, deputy head of treasury,
Münchener Hypothekenbank (MünchenerHyp)
Tobias Engel, director, treasury, head of capital
markets, Aareal Bank
Ursula Klemm, portfolio manager, W&W Asset-
management GmbH
Julian Kreipl, portfolio manager, LBBW Asset
Management
Sascha Kullig, head of capital markets,
Association of German Pfandbrief Banks (vdp)
Alexandra Schadow, head of financials/covered
bond research, Landesbank Baden-Württemberg
(LBBW)
Andreas Wein, head of funding and investor
relations, Landesbank Baden-Württemberg
Bodo Winkler, head of credit treasury and
investor relations, Berlin Hyp
Neil Day, manging editor, The Covered Bond
Report, and moderator
Cover photo: Neues Schloss, Stuttgart
Source: mr.donb/Flickr
Roundtable photos: Bert Klemp

the blocks this year, basically opening the market in January, and
that worked extremely well. It was something that we had been
looking at already in December and then we just waited for the
moment to go. The same holds true for our US dollar covered bond
benchmark, which was the only one from Europe in the first half of
the year, and which also worked extremely well.
Day, The CBR: It felt at the beginning of the year that
spreads were very tight and demand only really picked up
after there was a repricing some weeks later — did you
not encounter any difﬁculties in January?
Wein, LBBW: The market as a whole was really quite shaky, but
the transaction went extremely well, so there was more than
sufficient demand for that one. We felt very confident otherwise
we wouldn’t have come to the
market.
Day, The CBR: How have
investors found the market
this year? There have been complaints about the levels at
which the ECB is buying, but at a certain point we saw the
market cheapen. Have you been active in buying Pfand-
briefe and covered bonds?
Ursula Klemm, W&W: Since our clients are insurance compa-
nies, including also a life insurance company, we prefer investing in
long duration. Considering the current interest rate and the spread
levels of German Pfandbriefe in particular, we look for alternative
investment opportunities. These could be on one side Pfandbriefe
with a call option as a private placement. On the other side we are
open to covered bonds from other countries.
We also manage special funds in which we invest in mortgage
bonds and covered bonds in benchmark format. The current
spread level is very low and therefore not very suitable for a life
insurance company.
Kullig, vdp: If I might ask, does that mean that you stick to the
asset class covered bonds or are you already exploring other asset
classes like corporates or equities? Are you considering leaving the
asset class covered bonds as a whole?
Klemm, W&W: The asset class covered bonds is at the moment
not very attractive. We adapted our asset allocation to have the
possibility of increasing the share of non-German covered bonds
and other asset classes. This gives us the chance to achieve a higher
yield level without necessarily extending the duration of our expo-
sure. We do not increase the share of equities, but consider invest-
ment in the SSA asset class.
Bärdges-Koch, MünchenerHyp: This is exactly the feedback
I’m getting from investors. We can’t even talk about yield anymore,
because the bits and pieces that are left can’t really be described as
yield. A lot of investors we knew as private placement, long term
investors, always in plain vanilla paper, have changed internally as
well, as Ursula mentioned, so that they are allowed to have a single
call or maybe multi-callable bonds. Alternatively, we have, for ex-
ample, been asked, can you issue us 50 year Pfandbriefe? I would
love to, but I don’t have the assets, so no chance!
Winkler, Berlin Hyp: We’ve even been asked to issue 100 year
Pfandbriefe. This is where this interest rate environment is driving
investors at the moment. It goes without saying that we didn’t issue
100 year Pfandbriefe, because we haven’t got the assets either.
It was not only LBBW’s issuances that went extremely well. So
in spite of the type of concerns we hear from Ursula, we have these
massively oversubscribed books for most new issues. We have
done two benchmarks so far this year and each of them was almost
three times oversubscribed, and this is more or less the same for
other issuers as well.
And it is also notable that you have more international investors
this year than last year — not so
much for Berlin Hyp, as we also
had quite diversified order books
last year, but on average German
Pfandbriefe had very low pro-
portions of international investors in their books last year, while
this year it is normal to have at least 20%, sometimes up to 50%. So
we are witnessing a lot of changes.
Julian Kreipl, LBBW Asset Management: As an investor, I see
the situation pretty similarly to Ms Klemm. My main clients are
insurance companies, and we are still doing German Pfandbriefe,
but mainly with call options to get a yield pick-up. We are not really
doing German Pfandbriefe as benchmarks anymore, or not much
at least, even in our special funds and mutual funds — they have
been looking more at covered bonds from other countries to gain a
yield pick-up. For insurance companies, we are also looking to di-
versify with other asset classes because the yields are very low and
German Pfandbriefe are not really oﬀering a nice spread pick-up.
If I may ask another question regarding volumes: as I gathered,
you have been concentrating on small benchmark sizes of Eu500m
Sascha Kullig, vdp: ‘Given the circumstances and
some volatility we might see a lower outstanding volume
again this year’
‘We’ve even been asked to
issue 100 year Pfandbriefe’

in the last year or so, and in light of the ECB buying covered bonds,
wouldn’t it be preferable in order to increase liquidity to issue big-
ger benchmarks or tap benchmarks so they get bigger?
Bärdges-Koch, MünchenerHyp: The reason why most of the
German issuers have changed from Eu1bn to Eu500m is to steer
the portfolio in light of regulatory factors like NSFR (Net Stable
Funding Requirement). That’s the reason why we have all gone
down to lower issue sizes, even though we otherwise could do and
would love to do more.
Winkler, Berlin Hyp: The trend has even been increased by this
fact that private placements are not working anymore. When you
still had a fully-functioning private placement market you could
manage your portfolio more with these small private placements
to make the asset and liability maturities match. If you were now
to issue Eu1bn all the time you would have enormous steps in your
maturity profile that you can no longer fill with private placements.
Therefore, it is more convenient to do these smaller issues, for not
only regulatory but also rating agency considerations.
Wein, LBBW: And on top of that, if I may add, I don’t think that
a Eu1bn bond with pro rata ECB participation would be signifi-
cantly more liquid than a Eu500m bond.
Day, The CBR: Bodo, what gave you the conﬁdence that
you could persuade investors to go for a negative-yielding
benchmark?
Winkler, Berlin Hyp: The most important thing is to ask inves-
tors what their attitude towards negative yields on covered bonds
is. We began to talk with investors about negative yields a year be-
fore we ultimately issued, and we witnessed a certain change in
the interim, with attitudes shifting little by little. At the beginning,
in spring 2015, everybody would have said, no, don’t come with a
negative yield. Then you had the first — more outside Germany
than inside — bank treasuries saying, well, why not? If I can fund
myself at a negative yield I can buy you at a negative yield as well.
And after that you suddenly heard also from the one or the other
real money investor, well, I still have to follow a certain benchmark
and there is a German part that I simply have to cover, and at the
end of the day when you issue at least it’s 50bp more than if I buy
German Bunds. That of course gave us some confidence.
And then — bear in mind that this was before the announce-
ment of TLTRO II — we said, well, we can’t just stand on the side-
lines and watch one maturity bracket after another that we would
issue in disappear because yields are continuing to go down. Some-
body would have to be the first-mover, and we took this responsi-
bility. It was amazing to see that around 20% of the bond went to
real money investors. Additionally, I think it was the covered bond
with the lowest ever allocation to the Eurosystem under CBPP3.
Bärdges-Koch, MünchenerHyp: We also discovered that some
investors are buying German Pfandbriefe as a Bund surrogate, and
if portfolio managers are operating from a spread perspective then
they look at the spread against Bunds — and here we are talking
40bp-50bp — and the negative yield is no longer of interest be-
cause the pick-up is the decision-driver. And therefore we will see
more negative yielding bonds in the future, because it will become
just more and more normal.
Klemm, W&W: Life insurance companies have a legal require-
ment to achieve a positive return on their investments. Therefore
it is not possible to invest in assets which oﬀer a negative yield. In
order to avoid a negative yield in the actual market surroundings
an extension of duration is almost inevitable.
Kreipl, LBBW AM: You have to decide whether you want more
duration risk, credit risk or call risk to get the yield you need for the
insurance contracts you have to cover.
Day, The CBR: The proportion of the government market
that is trading at a negative yield increases on a daily ba-
sis. Bodo mentioned that it was before the TLTRO II was
announced that Berlin Hyp did its deal, and obviously that
now offers banks an alternative at the short end for fund-
ing instead of doing a negative yielding benchmark. It’s
not going to offer an alternative for the longer and longer
maturities that will now be negative yielding. Is it some-
thing you can envisage doing, Andreas?
Wein, LBBW: I think it really comes down to placement. If we feel
comfortable that it is placeable, then yes. I think it would be the
same process Bodo followed: talk to the investors first; once you
feel comfortable, go ahead.
Day, The CBR: My understanding is that the three year
dollar issue LBBW did last year was conceived partly in
light of the negative yields in euros. Claudia, what was the
rationale for MünchenerHyp going ahead with your new
$600m (Eu543m) three year benchmark?
Andreas Wein, LBBW: ‘The market as a whole was
really quite shaky, but the transaction went extremely well‘

Bärdges-Koch, MünchenerHyp: It has been quite a while since
we came to this market in benchmark size. We had not really
added any new US dollar loan business, and at certain stages the
cross-currency spread was just not supportive. However, we saw
the latest LBBW trade, which was also very successful, and this
deal was always on the cards.
Ahead of the new issue we had been looking at a variety of cur-
rencies, and the euro-dollar cross-currency basis swap moved sub-
stantially in our favour. Meanwhile, we are talking about a spread of
almost 50bp, so it might be something investors would look at — a
euro equivalent would definitely have been in negative territory.
So we asked our potential leads for an RFP for a US dollar trade
and they said the interest was definitely there. We thought it was a
good time to issue a dollar bond and the outcome really confirms
that we were right. We had books beyond $900m, and 33 orders
out of 14 countries. We also have many investor names in the book
that I don’t think we would have been able to reach via euros. It
was a great success.
We also monitor currencies such as sterling and Swiss francs,
and in our latest programme update we introduced new currencies
for Nordic and Asian investors as well, to be more flexible.
Engel, Aareal: A year ago we issued our first dollar benchmark
and there were several aspects to this that are helpful for us an is-
suer and also for investors.
At Aareal we do business internationally, so besides our euro
portfolio we have assets in dollars and British pounds. Until
three years ago we only used derivatives to hedge our cross-
currency exposure, but by issuing in this new currency we can
reduce our derivatives exposure. We already issued in sterling
the year before.
We also found a lot of new investors outside Germany, which
is usually the main buyer of our Pfandbriefe — we even placed
around 20% of the dollar benchmark in Germany.
For investors, we saw two positive aspects. While we have de-
creasing interest rates in Europe, they are higher in dollars, and
then with all the discussions about southern Europe and now
Brexit, the dollar is strengthening versus the euro. Finally, when it
comes to allocations, the ECB is not buying dollar Pfandbriefe, so
they are 100% distributed to asset managers.
Wein, LBBW: I would agree fully with these views on the dollar
market. We offer strong issuers with a strong Pfandbrief product in
a strong currency.
Day, The CBR: Turning to more economic concerns, how is
the collateral backing Pfandbriefe performing?
Schadow, LBBW: In Germany the asset quality of the collateral
is still very high. We had several discussions in the past about real
estate bubbles, but I think we are not at the stage where we have
one. We have to keep a close eye on developments in some of the
city centres in Germany, where we have seen very high price in-
creases. But on the other hand there are other factors suggesting
that banks’ credit practices are still very conservative and we have
meanwhile seen the German government planning measures to
ensure conservative lending policies are maintained, in line with
what we have seen elsewhere in Europe.
Kullig, vdp: Currently they are drafting a law allowing BaFin to
make use of four different macroprudential rules. The proposal is
that BaFin could ask for an LTV limit, a debt service-to-income ra-
tio limit, or a debt-to-income limit, and the fourth possible meas-
ure would be to require a minimum redemption within a certain
timeframe. Those four macroprudential measures should be avail-
able to BaFin should it consider it needs to be doing something.
And it is important to agree on precise criteria and conditions that
BaFin shall apply in order to make use of the new tools. But this
law is still in the drafting process — there is some delay there due
to internal discussions.
Day, The CBR: Would it be welcomed?
Kullig, vdp: There are two different aspects that have to be dis-
cussed. The first is, are these potential measures adequate and
necessary?
And the second question is whether it is right to allow the su-
pervisory authority to apply such measures without any consulta-
tion and instead just to say, we think this is needed and now we
require all banks to apply these measures.
Schadow, LBBW: And on top of that the real estate market in
Germany is in very good shape. For example, according to vdp
research, the average equity share in loans is 25%, and it’s a very
stable figure. So you are putting very ambitious additional rules on
top of what is a really good market in comparison to a lot of other
countries.
Bärdges-Koch, MünchenerHyp: Indeed, it is already conserva-
tive. I know this from the scorecard we use when providing retail
loans — it hasn’t changed for ages. I’m therefore surprised by what
Claudia Bärdges-Koch, MünchenerHyp: ‘The authorities
are always tempted to implement such measures’

they have in mind. And I think the authorities are always tempted
to implement such measures whether or not they are necessary.
Wein, LBBW: Yes, but couldn’t it perhaps make sense to simply
have these tools available? Because it is not that they are necessarily
going to apply them — just have them available if need be.
Klemm, W&W: If the supervisory authority implements these
new requirements banks have to modify their loan process. Then it
could become more difficult to get mortgage financing. This could
hamper economic development. From my point of view, the banks
should not be regulated more strictly by the supervisory authority.
Kullig, vdp: I totally agree. But one has to bear in mind that, in
any case, all those measures will only apply to new loans. The au-
thority will never be able to ask for the banks to apply these new
measures to outstanding loans.
Klemm, W&W: The fixed interest rate for mortgage loans must
be rolled over during the repayment term and in this context, the
new rules will take eﬀect.
Kullig, vdp: But another trend that can be seen in the German mar-
ket is that even if borrowers are very conservative, they are going for
very, very long maturities. So the fixed rate periods are getting longer
and many people are now taking 15 or 20 year mortgages.
Day, The CBR: How are conditions in commercial real
estate?
Engel, Aareal: We are very broadly diversified, with more than
20 countries in the overall portfolio, and 19 countries in our cover
pool. The main currency, I’ve already mentioned, is the euro, with a
bit more than 60%. We are concentrating on the core cities of coun-
tries, like London, Paris and New York. Looking at the first quarter,
for example, we saw quite stable
prices for office buildings in most
European regions. And concern-
ing the country where we are see-
ing our biggest growth, which is
the US, property prices are also
stable, with cap rates having found the bottom. So overall our asset
quality is good, with stable LTVs.
Schadow, LBBW: I have one question concerning the commercial
real estate markets: everybody is concentrating on metropolitan
areas like London, Paris, Berlin and Munich — are you still able to
get first class assets, or are you now in the suburbs of these metro-
politan areas?
Winkler, Berlin Hyp: There has been a trend — not only this
year, but for several years now — that is pertinent to your question.
An A location in an A city does not always make sense any-
more from an economic point of view, as even in Germany prices
have increased visibly and yields have gone down. Instead, there is
a trend of going either to an A location in a B city, or a B location
in the A cities. Yields are in many cases considerably higher there.
Regarding foreign markets, we tend to be present with small
branches and as you need full expertise on any market, this some-
what restricts us to the more metropolitan areas, as Tobias men-
tioned. And in many countries — such as France or the UK — the
markets are very diﬀerent from Germany with its decentralised
structure. All the business is concentrated in the capital, and of
course it then makes more sense to be lending in the capital as well.
Engel, Aareal: I agree with everything Bodo said. For sure, the
1A location office buildings in a 1A location in London or Paris are
quite difficult to find, so you have to go more to the 1B locations or
in a B property in a 1A location. And you have to have the experts
who can then analyse if this is the right decision. Of course, with
a 1A location, everybody knows it will be good; 1B needs more
expert know-how.
But it is very difficult in com-
mercial real estate — at least at
the sizes we finance, starting at
Eu50m — to go to smaller cit-
ies, as in secondary cities there
is the question of liquidity in the market not only now but also
in the future.
Competition in the US is also high; however, margins in the US
are much higher than in most Western and Northern European
markets — in nearly every European country competition has in-
creased dramatically in course of the past years, and in particular
in Germany the competition is very high. And in the US there are
a lot of big cities with opportunities to engage in.
Day, The CBR: What are the planned changes to the
Pfandbrief Act with respect to potential extendible maturi-
ties, and why are they being considered?
Kullig, vdp: We have been discussing this within the association,
Bodo Winkler, Berlin Hyp: ‘An A location in an A city
does not always make sense anymore’
‘A euro equivalent would
definitely have been in negative
territory’

with our member banks, for two years now or even longer, and
the reason for that is quite obvious. We all know that nowadays
the failure of even a big bank is no longer unthinkable. The lesson
learned from Lehman and the crisis that followed is that liquidity
risk could become a huge problem. The Pfandbrief Act already ad-
dresses liquidity risk in different ways, and offers the cover pool
administrator lots of options for raising liquidity once the Pfand-
brief bank has gone.
Nevertheless, there might be, let’s say, a worst case scenario
where a cover pool administrator won’t be able to raise liquidity
in other ways. We do have the 180 day liquidity buffer, which is
good, we have the risk management
requirement, we have the transparency
requirement, the cover pool adminis-
trator could raise liquidity by selling
assets or portfolios, he could even is-
sue new bonds which then would be Pfandbriefe… But even then
there might be a situation where the whole market is frozen and
where it might be useful to have the possibility to postpone re-
demption by a certain time. And our idea is by six months, twice,
so overall for one year. So we are talking about a worst case sce-
nario where there is no other possibility of raising liquidity for the
cover pool administrator. We are not talking about the issuer — it
is not an option for the issuer. It is simply the last resort, if you want
to put it like this, for the cover pool administrator.
Kreipl, LBBW AM: I am pro maturity extension, but I have some
difficulties with conditional pass-throughs (CPTs), if the bank
is getting a misleading rating by using CPTs. I’m fine with solid
banks which get a triple-A rating either way, but there might be
other banks trying to use CPTs or maturity extension features to
get a misleading and better rating — that’s where you have to be
careful and analyse thoroughly. But I do not see this with the Ger-
man proposal.
Kullig, vdp: Our idea is definitely not rating driven, because first
of all we want to keep the 180 day liquidity buffer, and secondly,
at least one rating agency already gives credit to this 180 day
liquidity buffer, so we do not expect a huge impact on the rat-
ing. Maybe the required overcollateralisation might decline for
some banks, but we certainly do not expect huge rating uplifts
for Pfandbriefe.
Another goal for us is to keep it as simple as possible, especially
to keep it in the Pfandbrief Act. What we do not want to see is the
approach that is common in other countries, where this is done
in the documentation, where you as an investor have to look at, I
don’t know, footnote 125 on page 320, and then you have to under-
stand it, and compare it to other documentations that are different.
Everything, as far as possible, should be put into the Pfandbrief
Act, which is very important for us.
Schadow, LBBW: I think it’s a clear advantage because if you look
at the CPT programmes, for example, in Europe every single is-
suer has its own standards for the CPT process and so that’s very
difficult to analyse.
Winkler, Berlin Hyp: Yes, and you could even as one issuer issue
totally different bonds, which really puts the investor in a position
where even when hearing the issuer’s name he doesn’t really know
what this product is about. It’s very complex to get hold of all the
documentation describing how this would work in the case that an
extension or a pass-through should kick in.
Bärdges-Koch, MünchenerHyp: As outlined by Sascha, that’s
the reason why it’s so important to have it in the Pfandbrief Act, so
that all over Germany there is one way of doing it, and you don’t
have to check every bilateral contract
with each issuer.
Wein, LBBW: That’s one of the major
advantages we have with our conserva-
tive Pfandbrief Act that is valid for everybody, and it should stay
like this. I personally welcome every change that makes it more
secure for investors.
Day, The CBR: Ursula, have you bought the CPTs from
other countries?
Klemm, W&W: Personally, I have not bought a covered bond
with conditional pass-through yet, but some colleagues of mine
have. I am not in favour of covered bonds with a conditional pass-
through structure which only serves the aim of receiving a better
rating. I dislike the fact that there is no possibility of figuring out
the final maturity.
Day, The CBR: But you might consider the modified
Pfandbriefe?
Klemm, W&W: It could be positive, if you do not have to ana-
lyse each programme regarding maturity and repayment arrange-
ments. If individual countries opt for uniform rules in their coun-
Tobias Engel, Aareal: ‘Imagine if you take the wrong
number and compare it with other issuers!’
‘We are talking about a
worst case scenario’

tries and there are only differences between countries, this would
be a viable option for me. Nevertheless, I am not in favour of con-
ditional pass-through.
Day, The CBR: The European Covered Bond Council has
followed up the Covered Bond Label with the launch of
the Harmonised Transparency Template (HTT) initiative. Is
this a good idea?
Kreipl, LBBW AM: Yes, this transparency template is probably a
good idea. It makes it a lot easier to get the information. You get
it quicker and within every country the information is the same.
The question, of course, is what information will be in this tem-
plate. Right now some countries are offering particular data that
will probably not end up in this harmonised template. So if you
want to go into the details, you might end up having to get the
original report from the issuers.
Schadow, LBBW: I support this view that it is a very good idea to
have harmonised data on the cover pools. However, there should
be some kind of quality check, for example with an accountant.
Kreipl, LBBW AM: You also have the problem with different
kinds of calculations, like for LTVs — they are calculated differ-
ently in every country.
Schadow, LBBW: That is still a big issue. These figures, typically
cover pool figures, that everyone is looking at — you can’t compare
them, but people do. That doesn’t really make sense. You have to
have a single definition and everybody has to calculate it in the
same way.
Kullig, vdp: To be honest, this is wishful thinking. You don’t even
have a common understanding within a single country — in some
countries, at least. So I expect an investor to always bear in mind
that they have to be careful. By all means get hold of similar fig-
ures, or even figures that are almost the same — but never forget to
look at how they are calculated and what they mean, because you
will never ever reach a level where they are exactly the same. And
therefore it is important, as the ECBC says, that you have a glossary
so that investors can see what the figures actually mean, how the
figures are arrived at. In my view it is very dangerous to just rely
on quantitative figures, compare them, and say, OK, that’s bigger,
better or whatever than this one, so this one is the better covered
bond. Be careful, I would say.
Engel, Aareal: I fear that some investors might use this tool to
put the data in an Excel spreadsheet, do their calculations, and fig-
ure out what they will buy or sell. And depending on exactly which
figures you put in, the outcome might be quite different. In our
cover pool, for example, the average market value is below 40%,
while the average mortgage lending value is 58% or 59% — so 20
percentage points difference. Imagine if you take the wrong num-
ber and compare it with other issuers! And there are a lot of other
fields that are similarly complicated.
Kullig, vdp: But nevertheless this trend goes on. We will see more
and more transparency, either on a voluntary basis, or forced by
harmonisation, by regulation sooner or later. We as an association
can’t force our member banks to join the Label, but we can encour-
age them to at least use the HTT, and we therefore offer to deliver
our member banks into the HTT. We transform the figures they
already have to disclose under the legal requirement of Section 28
of the German Pfandbrief Act, collect a few additional voluntary
figures, and transfer them all into the HTT. I only can encourage
vdp member banks to join this initiative because it is very useful.
Bärdges-Koch, MünchenerHyp: On behalf of MünchenerHyp,
I think this is a good approach, to set certain international stand-
ards. We will support this initiative and we will provide the addi-
tional information beyond Section 28 in the future.
But, as has been mentioned, it is a young initiative and I think we
stillhavetofindawaytoensurethatthis“onesizefitsall”approachis
not used. Maybe we just have to transform certain figures from, say,
the Spanish version of NPL calculations to the Italian version, or to
have a harmonised version of non-performing loan data.
Winkler, Berlin Hyp: And you should be aware of any differences.
I appreciate very much what Sascha mentioned, that we have our
glossary at the end of our templates, so everybody can at least read
what is meant by which figure. The only problem is that people do
not have so much time, and as there is a single template but many
glossaries, why not only deal with the numbers and avoid reading?
That’s what many people end up doing, so even if the information
is there it is not used, and that is a problem.
Kreipl, LBBW AM: As an asset manager I’m not basing my invest-
ment decisions solely on algorithmic number-crunching of these
reports. So I don’t see this as a concern. Maybe there are some
maths-oriented guys number-crunching and investing based on
the outcomes their algorithms are giving them, but, looking ahead,
I don’t really see it.
Alexandra Schadow, LBBW: ‘There should be some
kind of quality check, for example with an accountant‘

Klemm, W&W: But BaFin has urged insurance companies to de-
velop their own scoring models. It should thereby be documented
that the investor is examining his capital assets. Due to limited staff
capacity, “number-crunching” is a possibility for implementing the
BaFin requirements.
Kullig, vdp: We are not saying that you shouldn’t do this. That ap-
proach is certainly understandable. All we say is, besides using the
figures, bear in mind it might be worth having a look at the glossary.
But it’s true that’s how regulatory demands are developing —
that’s why more and more banks disclose more and more informa-
tion. It’s a work in progress.
Day, The CBR: Do you think the information you get at the
moment is sufficient, and do you look at it very regularly?
Or do you rely more on analysts and the rating agencies?
Klemm, W&W: If an issuer is rated by Moody’s, we use the perfor-
mance report from Moody’s, and analyse the figures presented in
the report. I also include in my analysis research reports, informa-
tion from the daily press and results of discussions with the issuer.
Because of being busy with many other duties and responsibilities,
sometimes there is only a little time left for intensive research.
Schadow, LBBW: But something that is very important is that,
besides the HTT figures and the cover pool data, you have to look
at the whole business model of the issuer. This should be a good
and functioning business model, which you consider will be suc-
cessful in the future. And only then can you invest in it. Looking at
the cover pool figures is not enough.
Kreipl, LBBW AM: Indeed, you are not just buying a covered
bond, you are buying that covered bond from a particular bank.
So in the end you also have to look at the bank, not only the cover
pool data.
Day, The CBR: But what about harmonisation of covered
bonds themselves, so we could have a EU covered bond,
a Euro-Pfandbrief or something? Is that something people
see as desirable, or likely to happen?
Bärdges-Koch, MünchenerHyp: The German perspective is
that we think — and it’s the reality — that the German Pfandbrief
Act is already so strong, and we don’t want this quality to be less-
ened by harmonisation — which would be counterproductive. But
I don’t know if everyone can be tempted to use more or less the
highest standards in the market.
Wein, LBBW: Isn’t every covered bond market in Europe cur-
rently working? Italian bonds can be issued, Spanish bonds can be
issued. So where’s the problem? Where’s the need to do this?
Kullig, vdp: But why does every covered bond market work at the
moment? Is it because they all have perfect covered bond laws in
place, or is it maybe because the market is not really pricing risk
adequately? So there might be some other reasons why all those
markets are working.
I agree with what you said, Claudia, but on the other hand we
have to see that covered bonds benefit from a huge range of pref-
erential treatment, and we could face the risk sooner or later that
regulators come to the conclusion that perhaps not all the existing
covered bonds and covered bond laws are of such a high quality to
justify giving preferential treatment to covered bonds. And we will
never get preferential treatment for Pfandbriefe on their own; we
always have to get preferential treatment for covered bonds as an
asset class. Therefore we think a kind of minimum harmonisation
might be the right way to safeguard these preferential treatments
— which are very important for us, for you as an issuing bank.
So the question is actually, what are we talking about? Are we
talking about full harmonisation, getting to a 29th regime or one
single European covered bond? Or are we talking about more
minimum standards, which could be achieved either through a
covered bond directive setting the framework, or maybe through
a kind of minimum best practice guidelines, based on the EBA
guidelines published in 2014? This could be a good alternative,
with the issue then being whether or not national legislators have
implemented those best practice guidelines into their respective
covered bond laws. I think this could be a good compromise.
Winkler, Berlin Hyp: This would represent a more viable way
than having one approach that has to be implemented everywhere,
because all the different covered bond legislations are not stan-
dalone legislations — they also interact strongly with the civil law
of each country, with the respective mortgage laws, and these are
different as well. So I cannot envisage how it should work if you
went for a really fully standardised approach where you have one
definition of a covered bond and then it has to be implemented
everywhere.
Schadow, LBBW: I think it would be very helpful to have min-
imum standards, because, for example, in several countries it is
Ursula Klemm, W&W: ‘You have to look at the whole
business model of the issuer’

very difficult or almost impossible to figure out if there is spe-
cial public supervision. If you have a minimum standard as to
what special supervision means then as an investor you know,
OK, you can rely on that. I think that’s a minimum target that
should be reached.
Kullig, vdp: Maybe on that point even a little more direction
would be appropriate, rather than just saying that you need spe-
cial public supervision, because this is actually part of UCITS.
It could say a little about what has to be done as special public
supervision, because no-one really knows how it works in each
country.
Kreipl, LBBW AM: Having this basis doesn’t really help investors.
As an investor you still have to look at each individual law to decide
which is the best and do I want to invest? Yes, it’s a fall-back, a basis
where you can start. But you can’t base thorough decisions on it.
Day, The CBR: Besides harmonisation, what else is on the
regulatory agenda? NSFR, Basel IV, risk weight ﬂoors, Lev-
erage Ratio…?
Kullig, vdp: Exactly. NSFR is a problem for some banks. For
instance, when it comes to the Required Stable Funding (RSF)
factor, mortgages that are refinanced through senior unsecured
or whatever are treated diﬀerently to mortgages that are part of
the cover pool. That causes problems, as does the treatment of
Pfandbriefe in the Available Stable Funding (ASF) factor, because
covered bonds with a remaining maturity below six months have
an ASF of zero, so there is a gap that is not justified. Some banks
may as a result need to diversify
their refinancing mix, maybe
to take deposits, for instance,
which is quite strange.
Then the Leverage Ratio is a
topic, definitely, and MREL. And Basel IV is I think the hottest
topic for many of our members, because it could result in a tre-
mendous increase in risk weightings for residential loans, at least
for multi-family loans, and for commercial loans — all those loans
where the repayment is dependent on the cashflow of the property.
This is a huge problem.
Engel, Aareal: I would agree with the Basel IV discussion.
Aareal Bank fulfils every Basel III requirement, but the draft
concerning this possible new RWA calculation and change of
standardised approach, or the possibility that you will lose the
advanced IRB approach, might change the business models of
Pfandbriefbanken. We concentrate on low risk assets, and if you
are punished for low risk investments, or you don’t get any ben-
efit from investing in low risk assets, then you are forced to invest
in higher risk assets, and you might then face a slight problem
refinancing these with Pfandbriefe, because the law is based on
low risk assets.
Winkler, Berlin Hyp: On Basel IV, there are from my point of
view two problems. On the one hand is this proposal to again apply
the standardised approach for risk weightings. When we concen-
trated on individual approaches, IRB, that also involved increas-
ing our own risk management within the bank. Returning to the
standardised approach is a step backwards.
And the other thing is exactly what Tobias said. Just because it’s
a cashflow-producing business, why should this be punished? It’s
low risk, it’s fully collateralised.
It really could be a game-changer for many, who will end up
going into higher risk business, or will not take anything onto their
balance sheets, but try to get rid
of it as soon as they originate it.
Our experience after the last fi-
nancial crisis was that having
a tradition of taking the assets
onto our balance sheets — caring for them, analysing them, risk
managing them — was very stabilising for the German real estate
and capital market.
Bärdges-Koch, MünchenerHyp: This is definitely, from our
perspective, moving in the wrong direction.
Look at our business model. For us the leverage ratio means
more equity. OK, our last dividend was 3.25% and we will just issue
more cooperative shares, but in relation to our business is such a
high equity ratio sensible? That is another question.
I don’t know if the regulators are simply trying to show every-
one that everything is secure, that nothing can happen, that there
will not be any more crises… But we all know that there will be
another crisis one way or another. And I think things are now very
close to being overdone on the regulatory side. 
‘Returning to the standardised
approach is a step backwards’
Julian Kreipl, LBBW AM: ‘You still have to look at each
individual law to decide which is the best’
This is an edited version of a sponsored feature
published in the July/August 2016 edition of The
Covered Bond Report magazine.

Quality by tradition: Even in troubled times, the Pfandbrief
is an especially sound investment. Its first-class quality and stable returns on
investment are valued by investors in Germany and abroad and, thanks in
particular to the stringent German Pfandbrief Act, it will remain the bench-
mark in the covered bond market.
w w w . p f a n d b r i e f . d e

The Pfandbrief Roundtable 2016

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