December 2008 | ifr special report | 9 PFANDBRIEFE ROUNDTABLE
Huber : When you look at the funding mix of the German Pfandbrief issuers, on average it was about 75% non jumbo and 25% jumbo funded. The 25% was to private placements and registered, et cetera. There were only a few issuers who really needed the jumbo instrument. Most – including LBBW – found the jumbo was not a necessary funding instrument. We used it from time to time, to generate new investors, but it was not a necessary instrument because generally it came more or less on the same level as the private placements. In fact, sometimes it was a bit more expensive for us – and that is the same for a lot of borrowers. So these days, if you can't do jumbo issuance it is not necessarily a big problem. Of course it stabilises your income, because – especially internationally – you have investors you can't tap with private placements. But overall it's not something which people are especially worried about.
Hagen : Things are exaggerated at the moment. You hear things like “this business model is dead” but it has been shown over the longer term that some business models change, while other business models that we thought were dead come back to life. At the moment it is very difficult to say how the whole banking environment will change. There will certainly be changes and adjustments, but we don't really know what those will be. So I would be very reluctant to say any business model is dead or has ceased to work. There is still room for specialised banks and there is still room for universal banks. I would not say there is only a future for the universal banks that can tap the retail markets. Specialised insti- tutions may have access to internal funding sources, or indirect access to retail funding. We really have to face the fact that, from 1995 onwards, the jumbo Pfandbrief market perhaps developed too much. We have seen jumbo issuance peak and it has been declining since 2001. The financial crisis has just increased the speed at which this process is occurring. But the development was already visible. This won't be the end of the jumbo market. There will always be some demand for specific investors.
Viteau : Is there still a need for some kind of stabilisation? The last 12 or 15 months have been characterised by repricing – no
Bernd Volk, Deutsche Bank “
We really have to face the fact that,
from 1995 onwards, the jumbo Pfandbrief market perhaps developed too much. We have seen jumbo issuance peak and it has been declining since 2001. The financial crisis has just increased the speed at which this process is occurring. But the development was already visible.
stability at all. The Pfandbrief issuer has gone more with private placement than jumbo. Covered bond issuers have basically stopped issuing covered bond. Maybe the mix will move again. Maybe next year or further down the line jumbo issuance will make a comeback. The size will still be there to some extent for most of the issues.
Volk : If we look at the biggest jumbo issuers in the list, they have either announced they will reduce the volume of their issuance, or they have difficulties accessing the market.
So just taking into account upcoming redemptions and expectations of very low or zero issuance in the very near term, the jumbo Pfandbrief market seems set to shrink significantly in late 2008 and 2009. Pfandbriefe survived 200 years of very
different funding and financial market regimes, and it will continue.
Dahmer : When things are improving next year, what will come back first, mortgage Pfandbriefe or public sector Pfandbriefe? I think in terms of having a sound business model, the mortgage Pfandbriefe, with 6% loan to value, could have the first chance to pick up.
Bertram : There are several answers, but I think on the public sector Pfandbrief side it's really hard for most of the issuers – maybe impossible – to make this business profitable. The redemptions are mainly seen in the public sector Pfandbrief, and this is going to continue. Some of them seem to be shrinking their businesses. So the recovery may start with the simpler products – the mortgage Pfandbrief. The underlying business is sound and there are positive margins. A lot of investors have disappeared from this market, so the remaining ones may find the business increasingly profitable. Maybe the investor community wants more insight – more information about how the banks are doing this kind of business and what's in the collateral pool. I'm optimistic about the mortgage sector Pfandbriefe. The next question is are we going to take the right steps to make this product successful? I am relatively negative on the public sector Pfandbriefe business.
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