The German Insurance Association has called for improvements to Pfandbrief transparency to be made via disclosure of additional information such as weighted average LTVs, and is also recommending a tightening of cover pool criteria.

GDV, Berlin

The calls were made last Thursday in a position paper on a draft bill transposing the latest iteration of the Capital Requirements Directive into national law (CRD IV Umsetzunggesetz), on which the finance committee of the German parliament is holding a public hearing today (Tuesday).

The position paper repeats some points made by the GDV in previous statements, but is thought to be the first on the draft Umsetzunggesetz since the CRD IV package was approved by the European Parliament on 16 April.

Investor mistrust about the value retention of security backing Pfandbriefe and covered bonds increased as a result of the financial crisis and is to a large extent due to insufficient information about the quality of the security and its ability to be liquidated if needed, said the insurance association (Gesamtverband der deutschen Versicherungswirtschaft, GDV).

“The German Pfandbrief Act has maintained its high standard,” it added, “but in light of the capital market developments of recent years and the observable developments in other European covered bond markets it must be further developed as a quality standard.”

It called for four main changes, two of which involve the provision of additional information and two of which concern cover pool eligibility criteria.

The disclosure of weighted average (LTVs) is a “central point” for the improvement of cover pool transparency, said the association, noting that this information allows investors to recognise and assess the actual quality of cover pools, “which creates or rather cements essential trust on behalf of investors”.

In its position paper the GDV at one stage refers to, in English, indexed loan-to-value ratios, although this translation does not seem to accurately capture the German term it uses, “durchschnittlich gewichteter Beleihungsauslauf”, and, as an analyst said, would seem to be superfluous in light of Germany’s Mortgage Lending Value (Beleihungswert), which is intended to take into account of and act as a buffer for property price movements.

The GDV said that the provision of weighted average LTVs would not only help facilitate international comparisons with other European covered bonds, but also secure long term trust in the German Pfandbrief.

In addition, the GDV said that separate information should be provided about residential and commercial real estate loans to counter a “dilution” of cover pools that has occurred over the past several years as a result an increased proportion of mortgage cover pools comprising commercial loans.

“More detailed information, split between household and corporate borrowers, as is already common internationally, is desirable,” said the association.

Pfandbrief issuers should also report more often, it said, on a monthly rather than quarterly basis.

In addition to this additional information, the GDV wants the quality of cover pools to be improved and called for two main changes in this regard.

First, only government bonds with a supervisory rating of at least 2 under Solvency legislation (understood to be equivalent to credit quality step 2, single A-plus to single A-minus) should be eligible as substitute collateral, it said, contrasting this with prevailing rules that allow public sector bonds from the “PIIGS” countries to comprise up to 20% of outstanding Pfandbriefe.

The Association of German Pfandbrief Banks (vdp) in June launched an initiative under which vdp members apply haircuts to assets from sub-investment grade sovereigns. The GDV’s position paper did not refer to this.

The GDC also said that underperforming assets should be legally regulated, for example, such that issuers should be obliged to remove them from the cover pool within a certain timeframe.