The Association of German Pfandbrief Banks (vdp) today (Monday) welcomed a late change to the European Commission’s CRD IV proposals under which covered bond risk weightings will be based on their ratings and not on the creditworthiness of issuers. However, the vdp remained concerned about the potential for a leverage ratio to disrupt its members’ businesses.

The association said that in principle it welcomed the draft directive, which was released last Wednesday.

“The passages of the Brussels draft directive that are relevant to the Pfandbrief largely take the special safety of Pfandbriefe and other covered bonds into consideration,” said Jan Bettink, president of the vdp.

According to the association, the change to how covered bond weightings are calculated was made late in the drafting process and followed an intervention by the German delegation. Bettink said that the move was “an important sign of the institutional support in Europe for the Pfandbrief”.

The vdp called for continued lobbying from German representatives in Brussels, in particular on the proposed introduction of a leverage ratio from 2018. It said that if this is introduced as a mandatory supervisory ratio, Pfandbrief banks’ “traditionally conservative cover loan business”, particularly low margin public sector lending, would be jeopardised.

“At the same time, this would be bad news for the public sector, because German Pfandbrief banks play a major role in the financing, above all, of German local authorities,” said Bettink.

The vdp has called for the leverage ratio to be introduced purely as an observation metric.

The CRD IV proposal leaves it to the European Banking Authority to decide, according to certain criteria, what assets will qualify for the two levels of assets that will qualify for Liquidity Coverage Ratios under Basel III and the vdp said that “it can no longer be ruled out that” Pfandbriefe could be included in the highest category. The Germans, alongside the Danes and some other countries, have been lobbying for their covered bonds to be considered alongside government bonds as eligible for LCRs as Level 1 assets.