By Ralf Werner, Manuela Spangler
The Pfandbrief, a more often than not triple-A rated German financial institution debenture, has turn into the blueprint of many lined bond types in Europe and past. The Pfandbrief is collateralized through long term resources comparable to estate mortgages or public quarter loans as stipulated within the Pfandbrief Act.
With a historical past that is going again to the 18th century and a excessive marketplace proportion in today’s coated bond markets, the German Pfandbrief is the main validated lined bond. until eventually this present day, no unmarried Pfandbrief has ever defaulted.
Even even though Pfandbriefe have survived the monetary main issue comparably unhurt, traders became extra delicate in regards to the creditworthiness of the corresponding supplier and sovereign, the power of the felony (or contractual) framework and the standard of the canopy pool serving as collateral.
This monograph offers a dependent in-depth research of the criminal framework and the hazards inherent in a Pfandbrief, taking into account contemporary marketplace advancements. ranging from the criminal framework, the German Pfandbrief is brought with out requiring earlier wisdom. lined bond similar dangers are defined intimately and their relevance to the Pfandbrief is punctiliously mentioned with concentrate on the 2 most typical Pfandbrief varieties, loan and public Pfandbriefe. as well as that, the monograph comes with an in depth selection of Pfandbrief-related literature and a thesaurus explaining the most technical terms.
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Extra info for German Covered Bonds: Overview and Risk Analysis of Pfandbriefe
Figure 19 shows the relevance of these risks pre- and post-issuer insolvency. While, for obvious reasons, issuer risk only matters pre-issuer insolvency, the Pfandbrief holders become exposed to cover pool risks, the risk of timely Pfandbrief repayment and structural and legal risks after issuer insolvency only. Figure 20 gives a detailed overview of the risks the Pfandbrief holder is exposed to. In the following, all these risks are analysed in detail. It is explained to what extent they are mitigated by the legal provisions of the PfandBG, through program-specific features such as voluntary overcollateralization and an issuer’s commitment to his Pfandbrief program, or by further risk mitigants such as supervision, transparency, systemic support or flexibility of legislation.
The weighted average life of cover pool assets is typically longer than the weighted average life of the corresponding covered bonds (Soldera et al. 2012), which 34 The exact wording of the extension option, however, plays an important role. For more details, see Hillenbrand (2011). 4 Risk Analysis 45 further mitigates reinvestment risk from maturing assets. In case of asset defaults, the question regarding the notional repayment should be more material than the lower interest earned on the reinvestment of the assets’ recovery value.
32 Therefore, currency risk is limited to a considerable extent, but as in the case of interest rate risk it should be noted that the stressed net present value only takes into account moderate stress scenarios and does not ensure that the cover pool would be able to withstand extreme market conditions. The latest amendment of the PfandBG will provide additional information in the context of currency risks as it includes disclosure requirements with respect to the net present value of assets and liabilities per foreign currency (Bundesrat 2013, p.