DZ Privatbank is understood to be interested in taking advantage of a new type of Luxembourg covered bond, lettres de gage mutuelles, that is being introduced via an impending change to the country’s covered bond legislation.

DZ Bank, Frankfurt

Lettres de gage mutuelles – or co-operative covered bonds or Verbundpfandbriefe, as they are also being called – are a fourth type of legislative covered bond that will become permissible in Luxembourg once an amendment to its lettres de gage legislation becomes effective. This is expected to happen imminently, after the country’s parliament approved the amendment on Tuesday.

DZ Privatbank is the Luxembourg-based centre for private banking of Germany’s co-operative banking group. A spokesperson for DZ Privatbank said she is unable to comment at this juncture because the bank is currently considering the topic.

Lettres de gage mutuelles are foreseen as covered bonds backed by loans to or guaranteed by credit institutions that are members of an “institutional guarantee system”. The bill specifies 10 conditions that such a network must fulfil to qualify as an “institutional guarantee system”, with the Luxembourg financial supervisory authority, CSSF – drawing on the opinion of the country’s central bank – needing to approve a system as such.

HSBC Trinkaus analysts have said that the new framework for lettres de gage mutuelles could encourage banks from countries with a co-operative network, such as Austria, Finland, France, and Germany, to set up subsidiaries in Luxembourg.

A banker familiar with the changes to the Luxembourg law said there was some opposition to harbouring this asset class under the lettre de gage legal framework, due to questions about whether it should be concerned a covered bond and out of concerns it would harm the lettres de gage product. However, the supervisory authority was in favour, according to the banker.

He said that DZ Privatbank was involved in the move to add the new class of lettres de gage, which resemble DZ Bank Briefe. These are a special form of German covered bonds and are governed by the DG Bank Transformation Act and only issued by DZ Bank.

According to Fitch, they are similar to German Pfandbriefe with respect to legal provisions regarding an issuer’s bankruptcy. However, in addition to assets also eligible for public sector Pfandbriefe, the DZ Bank Brief cover pool can contain debt against German co-operative credit institutions, loans secured on liens, and mortgage as well as public sector Pfandbriefe.