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Happy Birthday

04 January 2019
Richard Kemmish

The covered bond market is celebrating it’s 250th anniversary in 2019. Does it matter?


For most people the more birthdays they’ve had, the less they want to celebrate them. Not so the Pfandbrief market. Expect great things this year as the German issuers invite you to celebrate their quarter of a millennium of bond issuance. And if they take that opportunity to remind you that a) they are the oldest covered bond market in the world and b), they’ve never witnessed a default; who can blame them?

I can’t comment on the veracity of the claim – when I was at school all that I was taught about the seven years war was that it was the reason that the American’s don’t have to learn French (for which they should surely be more grateful?). Apparently Pfandbrief were initially designed to rebuild Prussia with money from Dutch merchants who – conforming already to stereotypes that would persist for centuries – were rather careful to ensure that they got their money back and therefore insisted on credit standards which would form the basis of what we see today. I’m sure you’ll hear much more eloquent and accurate descriptions of the market’s origins over the course of this year.

I’ve commented before that what happened in the first two centuries of the Pfandbrief market’s existence is far less important than what happened in the last 10 years and whilst this is true from a credit and technical perspective, perhaps it isn’t so true psychologically.

Most obviously being part of a 250 year tradition should engender risk aversion. You are no more than the current incumbent, part of a long and successful tradition: don’t screw it up. People often conflate risk aversion and conservatism, or even aversion to change, which does a great disservice to the Pfandbrief market and to one of the key principles of risk aversion (the riskiest thing is to take no risks). It has far more structural, supervisory and legal dynamism than most people give it credit for.

Another misconception about Pfandbrief is that it is an homogenous market (with an obvious analogy to misperceptions of Germany itself). A very long tradition gives a market time to develop, tolerate and accommodate diversity, whether it be asset class, size or business model. The ship Pfandbrief market, for example, is very old, old enough to have developed a good legal and credit understanding of the asset class. The difference between the market acceptance of Pfandbrief backed by ships and those backed by aircraft (which for collateral purposes are basically the same thing. Apart from the wings.) must surely be at least partly explained by the latter’s lack of a track record. 

History creates greater awareness. I would love to know what portion of German MPs know what a Pfandbrief is? All of them? I wonder what the corresponding number would be in other countries? The same could be said of bankruptcy courts, property developers or unsecured creditors. 

But – as an Englishman I can say this – the effects of history on psychology are not always positive. Perhaps the most shocking statistic of the last twenty years is the collapse in the importance of Pfandbrief relative to the total covered bond market – from three quarters of the market to less than one fifth. And this reality is not always mirrored by a corresponding awareness of less dominance in the global debate. Again, I’m English. 

Looking forward to the events of the centenary year, and all of the discussions that should accompany it.

Event, Articles and Videos that might interest you

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