Handbook of Finance: Financial Markets and Instruments

Chapter 26. The German Pfandbrief and European Covered Bonds Market

GRAHAM "HARRY" CROSS

Financial Tutor, 7city Learning

Abstract: Covered bonds are created through a securitization process. The collateral is commercial and residential mortgage loans and/or public sector assets. Unlike an asset-backed or mortgage-backed securities, the investor gets dual protection in the form of a claim against the issuer and a preferential claim over the cover pool in the case of the insolvency of the issuer. There are other differences. The covered bond market is dominated by the German Pfandbriefe. Within the German bond market, these bonds represent more than about one third of all German bonds and the largest uniform asset class within the European market. Globally, it is the largest bond market after the U.S. debt market.

Keywords: covered bonds, Pfandbrief, jumbo Pfandbriefe, traditional Pfandbriefe, structured Pfandbriefe, global Pfandbriefe, Pfandbrief bank, mortgage bank, Obligations Foncieres (OFs), Cedulas Hipotecarias, Lettres de Gage, Irish Asset Covered Securities

This chapter describes the German mortgage bond or Pfandbrief market, its institutions, and working practice. We also consider other aspects of the European covered bond market. The instruments themselves are essentially plain vanilla bonds, and while they can be analyzed in similar ways to U.S. agency bonds and mortgage-backed bonds, there are also key differences between them, which we highlight in this chapter.

THE PFANDBRIEF ...