The Pfandbrief Roundtable 2015

The Covered
Bond Report
The
Pfandbrief
Roundtable
2015
www.coveredbondreport.com September 2015
Pfandbrief_Roundtable_2015_Cover_2.indd 1 02/09/2015 11:39:47

2 The Covered Bond Report September 2015
SPONSORED FEATURE: THE PFANDBRIEF ROUNDTABLE 2015
Neil Day, The Covered Bond Report:
How has the Pfandbrief market de-
veloped this year?
Jens Tolckmitt, vdp: We have seen
Eu28bn of gross supply in the first half of
the year, part of which was 22 benchmark
transactions totalling Eu12.5bn. This is
somewhat unexpected, because it is quite
significantly above last year’s figure – al-
though it is very much in line with what we
expected at the beginning of the year based
on what our member banks reported they
were planning for 2015. This is Eu50bn for
the full year and I am reasonably optimistic
that we will end up somewhere in that re-
gion – in a market that, as we all know, has
not been at all easy.
Michael Schulz, NORD/LB: When it
comes to supply, it’s a question of negative
net supply. According to the Bundesbank
statistics from April, we have dropped be-
low the figure of Eu400bn for the first time,
to around Eu399bn. However, it looks to
me as if we are finding a bottom at around
Eu400bn or something just a little lower,
since the speed of the shrinkage is decreas-
ing. On the one hand the figures reflect the
shrinking of the public sector side, which
may shrink a little bit further, but on the
other hand it looks like the mortgage mar-
ket can compensate.
Day, The CBR: Are the mortgage
and public sector trends in line with
expectations?
Tolckmitt, vdp: What was clear in the pro-
jections we made at the beginning of the
year was again substantial net negative sup-
ply in public sector Pfandbriefe, and we ex-
pect this to decline a little further for some
time yet. Mortgage Pfandbriefe supply and
outstanding volumes should increase mod-
erately over the next few years. This takes
into account the new issuers taking up the
Pfandbrief and the fact that they usually
concentrate on mortgage Pfandbriefe.
It is interesting to note that we are
reaching the overall outstanding volume
that we saw in the beginning of the 1990s
and when you look at the development of
the overall Pfandbrief market I believe it is
more appropriate to compare it with this
period than with what we saw in 2001. My
feeling is that we are returning to the way
the public sector business was originally
conducted back in the 1990s, when the
market was around Eu400bn, so that may
indeed be kind of a bottom for the market.
Thomas Pönisch, Deutsche Kredit-
bank: That’s a good point. We are coming
back to a model where we refinance the
business rather than refinancing bond buy-
ing programmes.
Tolckmitt, vdp: Is that a bad thing? Maybe
not.
Pönisch, DKB: To put it frankly, no. We
have a very positive view of public Pfand-
briefe, but that is for refinancing our core
business. We haven’t changed this much
over the past 15-20 years. We focus on the
whole business around municipalities. We
look at Berlin or Leipzig, for example, as
an entry point into all the business related
to the community, whether that be public
transportation, schools, public utilities,
and of course real estate (i.e. multi-family
companies), which are the biggest part of
our portfolio. We see it as a very good busi-
ness and one to build up over the coming
years. There is always this talk about public
sector Pfandbriefe and how it is shrinking,
The Pfandbrief
Roundtable 2015
ECB measures, harmonisation, green bonds and two anniversaries – these and
other developments were up for debate when issuer, investor and investment bank
representatives gathered at NORD/LB in Hannover in mid-July for this roundtable
sponsored by the Association of German Pfandbrief Banks (vdp).
Pfandbrief_Roundtable_2015_2.indd 2 02/09/2015 11:35:23

September 2015 The Covered Bond Report 3
and some banks have decided to leave the
business, but we are successfully sticking to
the business, and we do it on a very, very
granular basis.
Bodo Winkler, Berlin Hyp: We have
not been active in that business for several
years now. After the collapse of Lehman
and all the regulation that ensued it was not
appropriate to continue in this business in
the same way, buying assets on the capital
markets in large scale and refinancing it
via public Pfandbriefe, as many mortgage
banks did. We were one of the first to say it
no longer makes sense and since then our
public Pfandbriefe have been maturing and
the assets maturing simultaneously, so it’s a
very orderly process of growing out of that
business. And under the circumstances we
witness today there is no need to even con-
sider stepping in again – and I think that is
the case for many others, too.
Carsten Tegtmeier, NORD/LB: On top
of that there has been a general change in
thinking. Most of the banks are still in the
process of shrinking their balance sheets,
and meanwhile maybe due to the low inter-
est rate environment there are a lot of other
investors interested in municipality debt,
so most of the banks who have good con-
tacts in this kind of business are not taking
the assets on their balance sheets anymore
but are trying to sell them directly to insti-
tutional investors like insurance companies
and pension funds. That is obviously, may-
be in some areas or in many areas, even
more attractive than just putting it on the
balance sheet and refinancing it with pub-
lic sector Pfandbriefe. That might change
again one day, depending on the develop-
ment of the margins. I can remember back
in the early 1990s the margins were pretty
poor yet most of the banks were happy if
there was a municipality Schuldschein ma-
turing and you could extend it again for a
very low margin – but that doesn’t make
sense anymore. Today we are living in a
completely different environment.
Michaela Ecker, NORD/LB Asset Man-
agement: In general we are not avoiding
public sector Pfandbriefe or covered bonds.
But we are looking in more detail at what
is in the cover pool. We are happy to buy
public sector Pfandbriefe with a granular
portfolio, but we wouldn’t be happy to buy
a covered bond where an issuer has just
Roundtable participants:
Michaela Ecker, portfolio
manager, European covered
bonds, NORD/LB Asset
Management
Thomas Pönisch, head of
treasury, Deutsche
Kreditbank
Michael Schulz, head of
fixed income research,
NORD/LB
Carsten Tegtmeier, head of
primary products, NORD/LB
Jens Tolckmitt, chief
executive, Association of
German Pfandbrief Banks
(vdp)
Bodo Winkler, head of credit
treasury and investor
relations, Berlin Hyp
Moderator: Neil Day,
managing editor,
The Covered Bond Report
Photo above: Neues Rathaus,
Hannover; Source: barnyz/Flickr.
Roundtable photos: Janko
Woltersmann

brought together a bond portfolio from all
over Europe and put it into the cover pool
and used the German framework to issue
a Pfandbrief. We are much happier to buy
public sector Pfandbriefe if we have the
feeling the issuers are deeply in the busi-
ness and understand what they are doing.
Tegtmeier, NORD/LB: So no repackaged
public sector debt?
Ecker, NORD/LB AM: No, thanks. We
are able to buy what we want by ourselves.
Tolckmitt, vdp: And there, perhaps, is the
underlying factor in this overall change in
business model: we are coming back to a
real lending business for those banks that
are actually refinancing the public sector
business by public Pfandbriefe. It’s not
buying in the capital markets based on
ratings or whatever and refinancing it via
Pfandbrief – there is a real loan business
behind it, which is why it is more granu-
lar, more burdensome for the bank, and
which is also why there is a clear added
value that a bank can provide to the over-
all system. That is today the unique sell-
ing proposition of public sector business
in banks. And I’m pretty sure that we will
continue to have this public sector busi-
ness, especially based on the development
of the margins – if there is an appropriate
margin, then why shouldn’t other banks
join in again and do it via public Pfand-
briefe? That is really the key development
over the last few years, which should
make investors more comfortable with
what they are buying if they buy a public
Pfandbrief.
Ecker, NORD/LB AM: It’s really necessary
for me to buy something I can’t do by my-
self. I can buy a Spanish region or a Spanish
govvie or whatever myself, but I won’t buy
something illiquid like a credit to Dort-
mund, Nurnberg, Essen or whatever.
Day, The CBR: How have issuers’
individual funding plans been going
in what have at times been difﬁcult
markets and given the ECB’s various
measures?
Pönisch, DKB: We basically tried to kick
start our funding early in the year because
we didn’t know what was coming in terms
of political risk, execution risk and so on.
Spreads were down significantly and li-
quidity was also very good at the beginning
of the year, so actually we tapped a 10 year
bond and then for the first time, in March,
we printed a 12 year benchmark. Our un-
derlying business is long term, particularly
on the public side, so we decided to go for
a long maturity.
By the end of the first quarter we had al-
ready printed roughly Eu1bn and normally
we print somewhere between Eu1.5bn and
Eu2bn over the full year – it actually de-
pends on the deposit side. We have a huge
deposit base and if we are still taking de-
posits we won’t do a new Pfandbrief issue
every two months because we don’t know
where to put the money – our loan busi-
ness is still growing, which is fine, but eve-
ry bank has to be careful not to cash-pile
money with the ECB.
So we did as planned at the beginning
of the year in terms of Pfandbrief funding,
but we also frequently look at the ECB re-
financing facilities, of course – ultimately
our participation is a question of the eco-
nomics. I got the impression that the stigma
of participating is not there anymore – we
don’t have the impression that investors are
interested in whether we took part in the
TLTROs; it’s more the ECB themselves ask-
ing us whether we would like to participate.
Tegtmeier, NORD/LB: We have a slight-
ly different situation. We have further di-
versified our funding strategy on a group
basis. Deutsche Hypothekenbank is fo-
cusing more on the real estate business,
meaning the typical mortgage Pfandbrief.
We at NordLB in Germany are focusing
on the public sector business – and as we
have heard earlier, this is at least for the
time being a little bit more in the direction
of placing public sector debt directly with
institutional investors instead of having
the Pfandbrief as an intermediary. And
apart from that, we have further devel-
oped our activity in Luxembourg, which
is the lettres de gage from our NordLB
Covered Finance Bank.
A couple of weeks ago we tapped one of
our outstanding issues and the reason was
similar to what Thomas said: there was a
nice enquiry from the ECB, and on top of
that there was also a reverse enquiry from
a couple of domestic investors and so we
decided to proceed with that.
Looking to the second half of the year,
we don’t have any major projects around
the Pfandbrief in mind. But we are one of
the friends of the aircraft Pfandbrief and
we have seen a little bit of movement from
the rating agencies. We started with being
granted just one uptick in terms of rating
from the senior debt, and this has become
a little bit better, so developing that further
is something we have in mind for the last
quarter of 2015. But in terms of the public
sector so far we don’t have any major activi-
ties in mind in Pfandbriefe.
Bodo Winkler, Berlin Hyp: ‘We are speaking more
and more about windows of opportunity’

Winkler, Berlin Hyp: The major project
for us in Pfandbrief this year has been our
Green Pfandbrief and the planning for this
was obviously a little bit different than for
typical issuance. We could not have come
with that at the beginning of the year as we
had so much work to do beforehand – the
preparations took almost half a year, get-
ting the second party opinion, having our
internal reporting, the website and all that.
We issued when we were ready in April.
We originally planned to issue a five
year bond, but when we did our roadshow
it was no longer the best idea because we
arrived in that slot where interest rates were
at their very lows. Five years would have
meant that we might have come into nega-
tive yield territory and most of the inves-
tors said, no, anything but a negative yield,
please. So we checked again and were able
to do a seven year deal instead, which had
a coupon of one eighth – which was then, I
believe, the lowest coupon ever on any sev-
en year covered bond – and a spread of mi-
nus 16bp. The order book was nevertheless
four times oversubscribed and we attracted
a lot of new investors from the responsible
investor universe, so that was a very good
experience.
The bond was very independent of
ECB demand. Our intention was from the
beginning to have a small portion of the
bond allocated to non-sustainable inves-
tors, as the ECB is by definition – they do
not buy us in normal times, so only for
this programme – but it was really our in-
tention to grow our investor base and we
were able to do so.
Looking more broadly at the market,
we are speaking more and more about
windows of opportunity. I remember
quite well times when you could issue a
Pfandbrief whenever you wanted; nowa-
days issuers wait for issuance windows
and if one opens you have to move. The
high volatility in interest rates is just one
driver of this development.
Schulz, NORD/LB: I think it is impor-
tant to talk about the purchase programme
in a little more detail. I am pretty sure that
everyone at the table agrees that no Pfand-
brief issuer welcomed the ECB coming
with the purchase programme because the
Pfandbrief market didn’t need the ECB
stepping in, buying big chunks. Having
the ECB in place, with purchases related
to the capital key, means that the Pfand-
brief will be the biggest market that they
have to buy. So we had a very stable and
very tight market before the ECB came to
the market and in the last 10 months we
have seen an even tighter market.
Some investors I have spoken with nev-
ertheless said that they are not very un-
happy that the ECB is in the market, that
they are a normal other investor – that is
a fair position, although I don’t agree. My
point of view is that the Pfandbrief is the
benchmark in covered bonds so if the
whole market is getting tighter the Pfand-
brief will get tighter still, and this makes it
pretty difficult when it comes to the inves-
tor base because at these tight levels no real
money investor is very happy about buying
Pfandbriefe anymore.
Ecker, NORD/LB AM: We welcomed
the ECB when they started the market
again with the first and second pro-
grammes. We were happy to see the
ECB fulfilling their responsibility to get
the market liquid and restarted again.
But truly the third programme wasn’t
needed because everybody was buying
covered bonds. There was really no need
for the ECB to buy covered bonds. And
if interest rates are tending to zero and
spreads going deeply into minus, I would
change from an investor to a sponsor for
covered bond issuers. Sorry, but it’s not
in my interest. Besides that there are the
consequences like being crowded out of
new issues, books being artificially in-
flated, not getting a satisfactory alloca-
tion. So why should I welcome the ECB
with a third programme? And if you look
at covered bonds from Spain or Italy, for
example, they are tending towards the
levels of, say, Sweden and the UK. Is that
really what we want to see?
Tolckmitt, vdp: I think it’s a very impor-
tant point, that this is not something that
is only affecting the Pfandbrief market: it’s
an overall issue for the covered bond mar-
ket. We had a compression of spreads re-
sulting from President Draghi’s “whatever
it takes” announcement, so they were al-
ready artificially compressed when CBPP3
started, and then they compressed even
further. After the beginning of the crisis,
over a reasonable time span spreads had at
least reflected the real differences between
products again, but that was then levelled
out once more not only by CBPP3 but also
the measures taken by the ECB before, and
I think that is unhealthy.
Tegtmeier, NORD/LB: This market is not
working the way it normally works, be-
Thomas Pönisch, DKB: ‘We didn’t
know what was coming in terms of
political risk, execution risk and so on‘
‘No Pfandbrief issuer
welcomed the ECB
coming’

cause you have a kind of synthetic buyer,
Mr Draghi, who goes shopping every day.
He can print the money in his backyard, so
that is not a real money investor. Maybe for
some issuers it is a nice game for a while
because you are able to fund yourselves on
very favourable levels, but 20%, 40%, 60%
of what you are doing is going directly to
the ECB. The number of real money inves-
tors is, I would say, decreasing. So what is
left is a couple of traders hoping they might
sell their positions in a week or two as long
as Mr Draghi is still on his shopping tour.
But what happens if that shopping tour
comes to a stop? That is what we learned
roughly six weeks ago, when suddenly you
are left sitting on positions, on levels where
you say, well, I’d better sell it, and then sud-
denly you look around in the market and
everybody says, no, please not me, don’t hit
me. And this is not a healthy development.
Pönisch, DKB: But we shouldn’t forget
that the third programme is actually fo-
cused on peripheral countries and juris-
dictions that have not been the tightest or
which didn’t have the liquidity – it is not
only about spreads, it is also about liquid-
ity. Some issuers in those countries were
not able to tap the market, so actually
Draghi put them in the position where
they could again go to the capital mar-
kets. And we shouldn’t also forget the end
of 2011 when this long term refinancing
operation actually restarted a market that
had been closed because of the problems
arising in some countries. So we should
give them a bit of credit that they reo-
pened even these covered bond markets.
Of course, you always have two sides and
the flipside is that you now have artificial-
ly low spreads in the Pfandbrief market.
Day, The CBR: To what extent did
the expansion of QE beyond cov-
ered bonds (and ABS) mitigate the
impact of CBPP3? Was that a wel-
come development and did it per-
haps temper the impact?
Ecker, NORD/LB AM: We had different
reactions from our clients. Some closed
down special covered bond mandates and
migrated to corporates or the like. Some
reopened their portfolios – at least at the
beginning – for the periphery, at least –
even for peripheral government bonds
– when they for years cut them out. They
thus tried to get around the really expen-
sive covered bonds.
The second problem is clearly the level
of interest rates. If we were on a level of let’s
say 2% or 3%, nobody would argue with
minus 16bp or so. But if you are already at
0.20% and you get minus 16bp… I am not
allowed to buy negative yields.
Day, The CBR: The European Com-
mission is preparing a paper on pos-
sible covered bond harmonisation.
What do you want from this? What
do you expect? What do you fear?
Tolckmitt, vdp: As we have reiterated,
the German Pfandbrief community is in
favour of harmonisation as long as it is
high quality harmonisation leaving lee-
way for different countries to develop
their product further. That is not only
because we want to keep the Pfandbrief –
certainly, we want to – but we think that
we have been successfully developing the
product into a quality benchmark and that
would no longer be possible if you only
have one product in the European market.
Luckily we do not expect the Commission
to actually adopt a maximum harmonisa-
tion approach where you end up having
one product. From what we know so far, I
would expect us to end up somewhere in
between a minimum harmonisation ap-
proach and a 29th regime approach where
you basically have all the national covered
bonds remaining in place and the Euro-
pean Commission thinking about devel-
oping their own European product. These
are the most likely elements of such a pa-
per and if that’s the case, and given that
we are in an early stage of discussions, I
think we can end up with a very satisfying
outcome in one or two years’ time.
Schulz, NORD/LB: I would welcome the
harmonisation of the covered bond market
where it makes sense. But we have a market
with very different countries and with very
different histories, and in some cases the
covered bond products differ in one way or
anothertoreflectthis,sothereforeit doesn’t
make sense to harmonise everything. The
Commission has to take into account these
differences and what lies behind them. We
then have to think about what it makes
sense to harmonise. The Commission re-
ally has to look at the details.
Winkler, Berlin Hyp: In the end you
cannot totally harmonise a product if
all the legal aspects underlying it are not
harmonised, too – we have totally differ-
ent insolvency laws across Europe, totally
different mortgage laws, and different ap-
proaches to our overall civil legislation.
And so that makes harmonisation really
almost impossible.
Therefore I think that setting useful
minimum standards would be a good
thing, making it easier for investors to
Carsten Tegtmeier, NORD/LB: ‘You look around in the
market and everybody says, no, please not me, don’t hit me’

compare products and to be able to rely
on certain aspects and standards already
being fulfilled simply because it is a cov-
ered bond.
Tolckmitt, vdp: We all have to bear in
mind that this is, in my view, a pre-requisite
for keeping in the medium to long term the
preferential treatment that we have for cov-
ered bonds in other European regulation.
Some are critical on this issue, whether or
not the preferential treatment should stay
in place. We as the industry have an interest
in keeping the preferential treatment and
one of the elements in making sure that
this happens is getting a stronger partly
harmonised definition of what a covered
bond is, and one that regulators feel com-
fortable with.
Day, The CBR: From an investor’s
perspective, are you in favour of
this?
Ecker, NORD/LB AM: Yes, clearly. As has
been pointed out, it makes total sense to
harmonise those aspects of covered bonds
that it is possible to harmonise. It will be
much easier for us to compare the differ-
ent jurisdictions. But the most important
aspect for us is not to dilute the stricter ju-
risdictions that we have, but to keep that.
Schulz, NORD/LB: The question for in-
vestors is: what are we gaining and what
are we losing? Under harmonisation we
may gain confidence and maybe a com-
mon understanding, but we would lose
differentiation and thereby lose opportu-
nities from an investors’ perspective. To-
day, you have core markets and non-core
markets, so there is an opportunity to buy
different markets, spread-wise and risk-
wise, but these opportunities would be
lost via harmonisation.
Day, The CBR: When it comes to
minimum standards, that could
cover collateral types: mortgages,
public sector loans, SMEs, ships,
aircraft… So far different regulatory
standards include some but not all
of those. Should they all be includ-
ed? Where should the perimeter be
drawn?
Tegtmeier, NORD/LB: When it comes to
SMEs and covered bonds, we take a very
conservative view. Because if you start to
include SMEs in covered bond legislation
then it’s not so far before you are on to
credit loans and student loans and tricky
things like that. So therefore the Germans
have a very strict definition of what kind
of Pfandbrief types should be available,
and of course that is the traditional pub-
lic sector and mortgage Pfandbrief, and
besides that we also have a Pfandbrief
law on ships and on aircraft, and that’s
it. Whether in future there might also
be asset classes like renewable energies,
with wind turbines and the like, that is a
question of whether there is it is an asset
class that might be more appropriately re-
financed through other instruments, and
also a question of volume.
The Germans have benefited so far from
a very clear approach to what a Pfandbrief
is and what can be put in the cover pool,
and this is supervised by law, and my view
at least at this very moment is that we are
quite well on track with that.
Tolckmitt, vdp: You also have to look
at where the discussion is coming from.
When you talk about SME loans being
included in the Pfandbrief, apart from
being sceptical about the quality and
the comparability of SME loans also to
ship loans and aircraft loans, I would
ask: is it something that the market re-
ally needs, is it something that banks
really need? And yes, there might have
been times when banks needed covered
bonds for basically everything, but that
time is over, and we are now in a situa-
tion where banks have ample liquidity,
have many ways to fund themselves, and
maybe there is no need to have a cov-
ered bond to fund SME business.
The next question is: does the political
expectation that SME covered bonds will
translate into cheap loans for SMEs really
hold true? Maybe not. I would say it may
be a cheaper funding instrument for banks,
but there is no automatic transmission
mechanism from the funding side to the
lending side – the pricing on the lending
side is based on a risk assessment and not
necessarily on the question of how cheaply
you can fund yourself.
And anyone who is politically consid-
ering introducing this kind of asset class
should consider all of that.
Sometimes it is said, look, the Germans
already have this kind of aircraft or ship
covered bond. It’s true, but the ship Pfand-
brief market has a volume of, after more
than 80 years, Eu8bn or less, and it’s similar
for the aircraft Pfandbrief. These are spe-
cialised products, but these volumes can
also be taken as an indication that maybe
‘What happens if
that shopping tour
comes to a stop?’
Michael Schulz, NORD/LB:
‘It doesn’t make sense to
harmonise everything’

a new SME covered bond product will not
translate into a huge market because it is
not needed by banks.
Winkler, Berlin Hyp: And when we think
of what Jens said just a couple of minutes
ago, from a more political perspective, that
we really want to keep the Pfandbrief’s
privileges, I can hardly imagine that this
could be achieved if you extend the asset
class by using more and more types of col-
lateral so you are not that focused anymore.
If we look at countries that have introduced
covered bonds and at which asset class
they have developed in the first instance,
it is always the mortgage covered bond.
Meanwhile in the case of Germany, after a
period where we have seen this exaggera-
tion in public sector covered bonds, we are
returning to the same again. So this is obvi-
ously somehow the core of what should be
a covered bond.
Tegtmeier, NORD/LB: It is also a bit
tricky from the technical point of view, be-
cause if you look at the Treuhander, he has
very strict guidelines if he is looking at the
mortgage for a building or at a public sector
loan or an aircraft or a ship. But how should
he value a loan to an SME? You would need
to be some kind of credit analyst.
Ecker, NORD/LB AM: Clearly there is
a difference between SMEs and the tradi-
tional collateral, because how should I ana-
lyse SMEs? I feel able to look at a mortgage
market, at a public loan, but I don’t feel
qualified to look at SMEs.
Tolckmitt, vdp: If I could add one thing,
and I think that differentiates also the fre-
quently mentioned aircraft and ship loans
from SME loans: when we in Germany
over time developed the law we always
looked at whether there is a comparable
structure to mortgages around the as-
sets in the cover pool, and that’s true for
ships and for aircraft, but it is not true for
SME loans. You have a tangible asset that
you can use, you have a register for all of
them where you can see what your rights
are. You have long term loans. And that is
very important and is the reason why we
are sceptical about everything that doesn’t
feature this.
At the vdp we looked for quite some
time and in quite some detail into renewa-
ble energy as a possible asset class for a clas-
sical Pfandbrief, and so far we have decided
against it because while it looks at first sight
pretty much like mortgages, because you
have a tangible asset, it’s not comparable,
and as long as we don’t have these prereq-
uisites we would not opt for something
called Pfandbrief in that area. Maybe you
can use it for a covered bond in some kind
of structured form or whatever, but it is not
suitable for a Pfandbrief.
Tegtmeier, NORD/LB: And I wouldn’t
call it a covered bond, I would call it a col-
lateralised bond.
Schulz, NORD/LB: To introduce anoth-
er perspective: we spoke very intensively
about asset encumbrance a year or two ago
– I don’t hear anything about that anymore,
but expanding the list of possible assets
would mean that the asset encumbrance
discussion would quickly return.
Pönisch, DKB: We are, if not the largest,
one of the largest banks in financing re-
newable energy with total loans of approxi-
mately Eu8bn. We have a very, very large
portfolio, and we think that it is certainly
worth looking at what instruments could
finance this. It is not clear what kind of
bond it might be in the end, but we should
be careful not to leave that business to oth-
er parties, namely insurance companies or
other investors, because they are searching
for yield and if we don’t do it, they will. Our
goal is to be a sustainable participant in the
market. We have an annual new business in
that area of Eu1bn, which is a lot for a bank
of our size, and we want to continue to do
new business. We have to find the best way
to refinance that business. We can’t do it by
means of covered bonds, but there might
be other interesting ways of doing it. It’s an
interesting topic and that is why the vdp
is looking at it every now and then, and at
ways to sustain it in the banking market.
Day, The CBR: Bodo, you spoke a
little earlier about how your Green
Pfandbrief went. Perhaps you can
tell us about the rationale behind it.
Winkler, Berlin Hyp: We looked at Green
Pfandbriefe quite early on, namely around
about five years ago. We were seeing a sig-
nificant trend on the asset side, especially
in foreign European countries, of prop-
erty investors investing in certified green
buildings, and some of them were already
financed by us. But in those days the vol-
ume was not big enough to issue a Green
Pfandbrief against. This changed over time
because the business increased. You see
‘We really want to
keep the Pfandbrief’s
privileges’
Michaela Ecker, NORD/LB AM:
‘Clearly there is a difference between
SMEs and the traditional collateral’

more and more of these certified sustain-
able buildings, and so we thought it would
be a good idea to have a special sustainable
refinancing tool for sustainable assets on
the other side.
This fitted quite well with other devel-
opments: we have already discussed how
the one or the other investor is leaving the
market and our wish in Berlin Hyp is to
broaden our investor base again with real
investors. As mentioned earlier, our Green
Pfandbrief allowed us to do this. Investors,
bankers and other market participants con-
sidered the issue to be a real innovation and
I think that is one of the reasons why it ul-
timately attracted such a large order book.
You have more and more investors – be
they banks, insurance companies or asset
managers – who have special funds that
have to be invested only in green bonds.
These investors want you to report in a very
specific way, so you have to explain exactly
where the environmental benefit is, which
is not too easy. So you need quite a lot of
preparation to be able to do that. But in the
end it worked out for us.
What we would really like to do is en-
courage other issuers to look at what Berlin
Hyp has done and go in a similar direction.
Maybe this could be for the one or the oth-
er a blueprint, or at least a stepping stone
towards something similar. In the overall
green bond market there is such great po-
tential, and I think Pfandbriefe and covered
bonds fit very well to that market because
at the end of the day so much about this
market is about transparency, and we are
transparent as well, on our cover pools. The
product Pfandbrief meanwhile has certain
sustainable aspects inherent to it via the
Pfandbrief Act. And so if you are a Pfand-
brief issuer so many of the prerequisites
for going to that market have already been
met. I really can recommend to any other
issuer checking this out and creating some-
thing similar.
Pönisch, DKB: As I said, we are looking
at that topic very closely. We have seen an
ESG (environmental, social, governance)
bond and now a Green Pfandbrief, and it
is no secret that DKB has a very, very large
sustainable portfolio of loans to the renew-
able energy industry, to municipalities,
to multi-family companies – so not only
green assets, but also socially responsible
lending in many categories. Roughly 60%
of our loan portfolio is sustainable, which
is a very large sum – you can actually do a
lot with it and of course we find this topic
very interesting. We are looking into it at
the moment, doing our homework. In what
format this will ultimately be remains to be
seen – although I don’t think it will be a
Pfandbrief.
Tegtmeier, NORD/LB: If the issuer is
aligned and the law is aligned then it would
probably make more sense to have a sepa-
rate cover pool, because what is the defini-
tion of a green bond? I know some French
names which are issuing green bonds that
are running nuclear power stations – I
don’t know if this is the same understand-
ing of what we might have of a green bond.
And if you are giving money to munici-
palities and then they are renovating their
council houses, making them more energy
efficient, this is in a way a little bit green,
too. But the issue is: who can prove that?
And speaking from the issuer side, as
long as there is no advantage in terms of
pricing for such a product then it isn’t really
appealing because, as our friends at Berlin
Hyp have shown, it is a lot of work.
In the longer term it might become an
option, but I think we should work more
on the development of standards. There
are some basic standards, but as an inves-
tor you have no guarantee what the issuer
is doing with the money which he is raising
in green bonds.
Pönisch, DKB: That’s why we take the ap-
proach that we first of all prove that our
business is sustainable. And with 60% of
total loans of roughly Eu60bn we certainly
can do that. Of course, our money can-
not be marked, as such, but if we go to
the market for Eu500m and say that it is
a green bond, we don’t need to prove that
we invest the proceeds into sustainable as-
sets because our new business in that field
is significantly above the common bench-
mark size of Eu500m. So you have to prove
that you are really taking this sustainable
and green funding seriously, and not just
because it is a hot topic. You should be
careful to have a really sustainable business
and also a sustainable market presence, be-
ing a long term oriented issuer. That’s why
we our doing our homework first and – as
Bodo said – there’s a lot of work to do. But
once we are there we will certainly not then
be a one-hit wonder.
Winker, Berlin Hyp: I would really like
to reply to what Carsten said. Of course
you can prove that you use the proceeds
of this issuance properly. This is the role
of the third party, to confirm, yes, they re-
ally spent such and such amount on such
Jens Tolckmitt, vdp: ‘In the long run you have to have some kind of standards
in order to deﬁne an asset class that merits the name Green or sustainable‘
‘What is the
definition of a green
bond?’

and such project. Berlin Hyp will be very
open on that. We will state exactly which of
our projects fulfilled these standards. The
standards that we set ourselves are public,
so everybody can see them. We will do this
new business reporting every year. We will
then show it to our second party opinion
provider to verify each year that we com-
plied with our own use of proceeds. So I
think you can do that.
It is always difficult to say this is green,
this is brown, this is blue, or whatever.
But ultimately, these very focused inves-
tors have their own definition of what
they consider to be green. They have their
standards, and either your bond fits or it
doesn’t fit. They have tools to analyse this,
and they only will buy you if you fit their
standards. So for this very dynamic but
still very small market, green bonds, it’s
very good that we have no real definition
of what green is, in the end, but give this
market the opportunity to grow first. And
at the end of the day I think that every
bond that is able to provide an environ-
mental benefit is a good thing.
Tolckmitt, vdp: I fully share Bodo’s view
that there is a kind of natural link between
a product like the Pfandbrief and the idea
of sustainability. But I do think that in the
long run you have to have some kind of
standards in order to define an asset class
that merits the name Green or sustainable
or whatever. And you see that with other
asset classes already. Otherwise you will
end up having borders that are blurring
into products that are maybe not as green
as they pretend to be, and by discussing
early on at least what these standards could
be you can help such an asset class or sub-
asset class to grow.
Winkler, Berlin Hyp: Because we already
have such standards as the Green Bond
Principles, I think it would maybe be the
vdp’s task not to define what is a green
bond, but the minimum standard for a
Green Pfandbrief.
Ecker, NORD/LB AM: We can affirm
growing demand for green bonds in terms
of volume and number of our clients. The
reasons are to avoid negative headlines, a
firm conviction, and even better perfor-
mance, at least over a longer period. But
since it means more complexity regarding
the investment process we won’t appreciate
higher prices or tighter spreads for these
bonds. And to say it once again, the low in-
terest environment makes it nearly impos-
sible to accept fees of any kind.
Day, The CBR: How are German
property markets developing?
Winkler, Berlin Hyp: Demand for Ger-
man property, be it commercial or residen-
tial, is still very high. We see yields again
this year going down and prices going up
– especially in the top locations in the big
metropolitan areas. And of course you can
wonder a little bit when this might come
to an end.
On the other hand you have this ongo-
ing low interest rate situation, you have a
lack of investment alternatives, and you
have the very good economic situation
in Germany with a labour market that is
working very well and very efficiently. This
would speak for the continuation of the
price development.
Pönisch, DKB: DKB’s largest loan portfo-
lio is to the multi-family housing industry,
so we have exposure to the residential mar-
ket in large cities and also B cities, and I can
only confirm that the cashflow generation
of those companies has been going up sig-
nificantly over the past 10 years. And the
market value of the Pfandbrief collateral
– which is ultimately what we are discuss-
ing here – has largely developed very posi-
tively over that period. Of course in every
city there may be some streets where prices
have sky-rocketed because some guys from
abroad are just pumping money into the
market as a safe haven. But the market is
still healthy in Germany, where you have a
very, very good economy.
Winkler, Berlin Hyp: Yes, but in a way
you have to monitor developments more
carefully nowadays than three years ago.
That’s at least what we do in Berlin Hyp.
On the other hand, you have a situation
that differs, happily, quite a lot from what
we saw between 2005 and 2007. Inves-
tors, because of the availability of cheap
money, are bringing a larger share of
own capital with them when they invest
into real estate, so you don’t have this
high leverage that you witnessed in those
days. And I think that is really one of
the big differences that makes us all feel
more comfortable.
Tolckmitt, vdp: And one thing that is
again evident in the current environment is
the sustainability of the regulation around
the Pfandbrief. You have a widening gap
between what other countries call the mar-
ket value and our mortgage lending value
(MLV). This is positive for the Pfandbrief
investor because the question of how much
you can put in the collateral pool is based
on the MLV, and so the buffer is growing.
Day, The CBR: The 10th anniversary
of the Jumbo Pfandbrief was cele-
brated with some fanfare in 2005,
but the 20th anniversary in May
passed with little comment. Did you
have any celebrations in Berlin?
Tolckmitt, vdp: No, we didn’t. Obvi-
ously everybody knows the market today
has changed a lot towards a new normal,
which is benchmark issues. But I would
still say something in favour of the Jumbo
Pfandbrief. If we hadn’t had the Jumbo
Pfandbrief, I would say that we wouldn’t
be sitting around this table, that a number
of countries wouldn’t have covered bond
jurisdictions, that Neil Day would not
have worked at The Cover nor at The Cov-
ered Bond Report. And we also wouldn’t
have the attention – good or bad – from
European regulators regarding our prod-
uct – that is very important and shouldn’t
be forgotten.
Twenty years? The attention span of
capital market participants is normally
measured in weeks or months rather than
years, so 20 years in the capital market
sphere is quite a lot. And coming from the
original Pfandbrief market that we had be-
fore 1995, the Jumbo Pfandbrief was a big
leap and a catalyst in restarting the market,
developing the market, and making it in-
‘You have to monitor
developments more
carefully’

ternational. That is still the case – no matter
what has happened in the interim.
There are reasons for Jumbo Pfand-
briefe no longer being around as they used
to be – one of them being the public sector
business on the asset side – but there are
still reasons to say positive things about the
Jumbo Pfandbrief.
Tegtmeier, NORD/LB: The best idea ever
was bringing to a very safe product liquid-
ity that is to a certain extent comparable to
what we have seen in government bonds,
and therefore there was a need for bigger
volume. When I remember the old times,
we started with DM500m, then DM1bn,
and from one night to the next we did Eu-
1bn instead of DM1bn – so we doubled it
in just two days. Sometimes it was a little
bit overheated in terms of volume, but this
is part of the past, no doubt about it.
You are absolutely right: some other
jurisdictions thought that the German
Pfandbrief had a huge advantage com-
pared with other asset classes in Europe
and that was more or less the starting point
for other jurisdictions to join in with the
covered bond products – sometimes simi-
lar, sometimes slightly different – that we
have today. From that point of view, even
if nowadays Eu500m is normal, the Jumbo
Pfandbrief is an ongoing success story, I
would say.
Winkler, Berlin Hyp: To add some-
thing to Jens’ list of what we all would
not have, the LCR, for instance – we
would not have the privileged treatment
that we now have. And if we come back
to the low interest rate environment and
the lack of interest of some real money
investors in buying covered bonds today,
their inclusion in the LCR and privileged
treatment opened up an alternative in-
vestor base.
Schulz, NORD/LB: And the main idea
was to create a liquid market and a liquid
product. What we learned since the crisis
is that even though you may have a Eu5bn
Pfandbrief outstanding, this product hasn’t
necessarily been liquid – you have to find
a buyer for it. This is what liquidity ulti-
mately means. And a Eu500m deal could
be more liquid than a Eu5bn one.
Day, The CBR: Another birthday, not
20 years, but 10, for the Pfandbrief
Act. Did it have such a life-changing
impact as the Jumbo did for me?
Tolckmitt, vdp: First of all, there was no
alternative to the abolition of the Mort-
gage Bank Act, because it was something
that would otherwise have been a consti-
tutional issue in Germany. We therefore
had to open up the formerly specialist
bank principle and offer the issuance of
Pfandbriefe to basically everybody. And
at the same time public sector guaran-
tees behind public sector banks’ issuance
activities enshrined in the Public Pfand-
brief Act were abolished so the need to
create a uniform and comprehensive le-
gal basis for Pfandbrief issuance became
even more pressing.
The important thing was to make sure
that the safety perception of the Mortgage
Bank Act was transposed into the new era.
ThatworkwasdonemainlybytheVDH/vdp
and I think we have been successful at that.
The most important consequence was
that, especially in the financial crisis, the
role of the Pfandbrief changed from a
funding instrument of certain specialist
banks and public banks that were allowed
to issue Pfandbriefe into a strategically im-
portant funding instrument for more or
less every bank. Clearly that was mainly a
consequence of the crisis, but it wouldn’t
have been possible for many banks to actu-
ally get the Pfandbrief if there hadn’t been a
general Pfandbrief Act.
Tegtmeier, NORD/LB: It was also a big
advantage for investors, because suddenly
they got new names for the Pfandbrief,
where they still had lines in place. This
brought more liquidity to the market as a
whole, so from that point of view it was the
best thing that could happen.
Pönisch, DKB: We are the best example,
really, because we would not have been able
to issue a Pfandbrief if the Pfandbrief Act
hadn’t come to life in 2005. Now, when I go
to investors, I tell them, OK, we have three
main pillars of funding and one of the most
important on the capital markets is the
Pfandbrief. So this was a huge opportunity
for us, and we can only say thank you to
those who arranged this.
Without the Pfandbrief Act we would
not have been able to tap that liquid mar-
ket in the early months of the financial
crisis, after having luckily already printed
our inaugural bond in 2006. The execution
opportunity provided by the covered bond
market was a big strength for us during the
crisis – as it was for other banks. n
‘It was
the best thing that
could happen’

Quality by tradition: Even in troubled times, the Pfandbrief
is an especially sound investment. Its first-class quality and stable returns on
investment are valued by investors in Germany and abroad and, thanks in
particular to the stringent German Pfandbrief Act, it will remain the bench-
mark in the covered bond market.
w w w . p f a n d b r i e f . d e

The Pfandbrief Roundtable 2015

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The Pfandbrief Roundtable 2015