The upper house of Germany’s parliament approved Pfandbrief Act amendments on Friday, meaning the country is set to be the first to transpose the EU covered bond directive. Calls to amend align the 180 liquidity buffer with new extendible maturities were rebuffed, to the expected benefit of credit quality.

The passage of the German CBD (covered bond directive) Implementation Act through the Bundesrat last week follows its approval by the Bundestag (lower house) on 16 April.

“Besides bringing German law into line with EU legislation, the Pfandbrief Act amendment sets forth important rules on building insurance in particular as well as on maturity extension, which the vdp has advocated for quite some time,” said Jens Tolckmitt, chief executive of the Association of German Pfandbrief Banks (vdp).

As well as the measures mentioned by Tolckmitt and other changes, the update introduces a minimal nominal overcollateralisation (OC) requirement of 2% for mortgage and public sector Pfandbriefe, and 5% for other Pfandbriefe, aligning German legislation with the CRR Article 129 – the Pfandbrief Act has hitherto included only a 2% minimum present value OC requirement.

While the introduction of extendible maturities met vdp calls for such a move, legislators did not deviate from their initial draft, whereby a 180 day liquidity buffer is calculated on the basis of the expected maturity date. Banking industry body Deutsche Kreditwirtschaft, which includes the vdp, had called for the buffer to be calculated on the basis of the extended maturity, with analysts noting the proposed approach could be seen as “double counting”.

“Germany will thus continue to be one of the covered bond countries in which the liquidity buffer is interpreted relatively strictly,” said Ted Packmohr, head of financials and covered bond research at Commerzbank.

“This could develop into a quality feature in the long run,” he added, “but is currently not rewarded by the market.”

Fitch said today that as a result of the introduction of the 12 month maturity extension feature – which will apply to outstanding as well as existing Pfandbriefe – it will increase the payment continuity uplift (PCU) it assigns the product under its methodology to six notches, from four for mortgage Pfandbriefe and from five for public sector Pfandbriefe.

“For Pfandbriefe already rated AAA, this will increase the number of unused notches above the issuer rating,” said the rating agency.

“In our cashflow modelling, we will also take into account the maturity extension in combination with the 180 day liquidity provision,” it added. “This may lead to lower breakeven OC ratios for a given covered bond rating as a result of better assets and liabilities matches in covered bond programmes.”