Archive for December 2nd, 2019

Germany’s most famous financial export: Pfandbrief’s (covered bond) 250th anniversary..

December 2, 2019

I did blog about the 250th anniversary of Pfandbrief earlier. Pfandbrief means bonds in German and is basically a covered bond.

On the website of German Pfandbrief Banks, these bonds are called as German’s top financial export:

In the course of its 250-year history, the Pfandbrief has evolved into one of Germany’s top financial exports and is rightly regarded as playing a leading role in shaping the European covered bond market. The Pfandbrief has also had a significant impact on Germany’s long-term culture in the financing of real estate and local authorities, and has since established itself as an indispensable element of the strategic refinancing mix within the banking industry. A brief and concise overview of the various milestones in the history of the Pfandbrief can be found here.

In a recent speech, Jens Weidmann of Bundesbank gives a speech to commemorate the occasion. Title of his speech: Consistency as a mandate as Pfandbriefs have consistently helped finance multiple projects nit just in Germany but across the world too:

Boredom is less desirable for a festive occasion such as this, but all the more so for Friedrich Nietzsche, to whom boredom was a precondition for original thought and productive action.[2]

Central bankers do not find boring to be all that bad, either. As former Bank of England governor Mervyn King used to put it, “boring is best”. With a view to predictable monetary policy, he explained that “a successful central bank should be boring”.[3]

As regards the Pfandbrief, a reputation for being boring is at once a compliment and a seal of confidence. Once money is put on the table, many lose their lust for adventure.

What makes these bonds tick?

Let me begin with this question: what is the recipe for the success that the Pfandbrief has enjoyed over such a long life?

Its unique selling point is undoubtedly its high level of security: Pfandbrief holders enjoy two layers of protection against default. That is like circus acrobats who are protected by a net and a safety line – or someone who wears both a belt and suspenders.

Not only is the issuer liable, but the Pfandbrief is also covered by a pool of assets subject to statutory quality standards and conservative measures of value. If the issuer becomes insolvent, the Pfandbrief holders have the right to the cover pool, access to which is denied the other creditors.

This double layer of protection comes with a further advantage: as the cover assets remain on the issuer’s balance sheet, it is in the issuer’s own best interest to avoid a creditor default and to handle risk-relevant information carefully. Experts refer to this as having “skin in the game”.[4] The expression illustrates that, in the event of a default, the issuer will not get away with his skin intact.

This mitigates the moral hazard of issuing loans without performing due diligence on clients and sufficiently monitoring them. This incentive problem is often seen as one of the factors leading to the onset of the sub-prime crisis in the United States.[5] Pfandbriefe can therefore make an important contribution to financial stability. On the other hand, it is also possible that, in extremis, the issuance of covered bonds can get out of hand.

What is good for the Pfandbrief holder can put the other creditors of a bank at a disadvantage: the more covered bonds an institution issues, the more collateral is set aside to cover them – and the smaller the quantity of unencumbered assets available to cover the rest of the bank’s creditors.[6]

Such asset encumbrance must always be kept in mind. This is why transparency is decisive, and institutions are required to disclose their holdings of encumbered assets. However, the Bundesbank does not believe that regulatory intervention, such as by setting a cap on asset encumbrance, is necessary.

What the topic shows us is this: the security of the Pfandbrief is not necessarily identical to the security of the issuer. And, during the financial crisis, individual issuers did, in fact, encounter severe distress. This was due, not least, to attempts to use short-term funds to finance long-term business. However, not a single Pfandbrief defaulted. This is why Jean-Claude Juncker has found that “[c]overed bonds have proved themselves to be a reliable and stable form of financing, particularly during the financial crisis”.[7]


He also talks about Grüner (Green) Pfandbriefs:

Risks, interactions and keeping sight of the big picture are critical factors when it comes to another topic, too: climate change. When Alexander von Humboldt witnessed the environmental damage caused by plantations on his travels in Venezuela, he was able to join the dots and warned of the human impact on the environment and its consequences for future generations. In particular, he noted the important role played by the forest in cooling the air, storing water and protecting against soil erosion.[13]

Climate change is a challenge that we all face. Christine Lagarde, President of the ECB, has said that all public and private institutions should act, within their mandates, to address it.[14]

The first “Grüner Pfandbrief” was issued back in 2015, even before the Paris Agreement was signed. Without wanting to flatter, it is now safe to say that this product innovation, which was designed to finance energy-efficient buildings, was a little ahead of its time.

The green bond market as a whole can make a substantial contribution to financing environmentally friendly projects. In Germany, sustainable investment has risen by over 70% in the past four years. What is more, strong market growth can be observed globally as well.[15] And yet the role played by green finance remains fairly small. Green bonds account for only just 2% of the international market as a whole. In other words, green finance probably still has considerable potential.

A key requirement here is a clear, generally accepted definition of what “green” and “sustainable” actually mean. This could also strengthen confidence in green finance, as it would counteract the effect of “greenwashing”. What this means is that a financial product is, for example, marketed as being green without actually being environmentally friendly.

A variety of standards and principles aimed at preventing such deceptive labelling and providing investors with clarity already exist. Expanding on this, the European Commission is currently working on its own classification system. This taxonomy will make it possible to classify sustainable financial products in a way that is uniform, clear and reliable. It is the centrepiece of the EU’s Sustainable Finance Action Plan and is intended to serve as a reference framework for investors so that Europe can reach the climate goals set as part of the Paris Agreement.

More here on the Banks website

Nice speech giving a glimpse of history of financial instruments..

Common Chiffchaff: The bird that makes the sound of money!

December 2, 2019

Given this blog focuses so much on things related to money and banking, this piece by Abhishek Gulshan in the Hindu is quite amazing:

Low temperatures in the city gives us bird watchers a cause for great celebration. Bird sightings go up as many winter migrants make their way into Delhi-NCR, keeping all of us on the lookout every day.

One bird to visit the city is the Common Chiffchaff or Phylloscopus collybita, as it’s known scientifically. Phylloscopus’ literally translates to leaf-seeker and ‘collybita’ has been derived from the latin word ‘collybista’, meaning the money-changer, from the sound it makes.

In its breeding time, the song of the bird resembles a two-note high-pitched sharp and rhythmic ‘chiff-chaff-chiff-chaff-chiff-chaff’. In areas where they migrate to, they generally utter a warbling ‘hweet’. The bird has onomatopoeic names in many other languages apart from English, reiterating the significance of its sound. ZilpzapinGerman, Tjiftjaf in Dutch, and siff- saff in Welsh.

Perhaps one of the hawk/dove/owl used to justify positions of central bankers should make space for Chiffchaff. How should a chiffchaff central banker be defined?

Three papers discussing the stormy birth of “Europe”:

December 2, 2019

Joseph Halevi of INET has written three interesting papers on Europe.

He explains these papers in this post:

hese three INET Working Papers analyze the gradual emergence of the European Union and its monetary systems through early years of the introduction of the Euro. Their point of departure is the crucial role oligopoly plays in the evolution of modern capitalist economies and the dominating influence of the principle of effective demand in the dynamics of these systems.

These factors, though, cannot be understood apart from specific institutional and political conditions not simply in relation to fiscal and monetary policies but, and especially, in relation to the context of the international relations ruling in any given period. Arrangements that would have been conceptually and politically all but unthinkable prior to 1945 became the main pillars of Western Europe’s recovery undertaken under the aegis of the United Sates: The Marshall Plan, the creation of the European Payments Union, and the London Conference of 1953 leading to the drastic reduction of the German debt. In each of these the external factor, i.e., the balance of payments positions of the countries concerned took center stage. The balance of payments issue encapsulated the question of effective demand since for virtually all the Western European countries, including the Federal Republic of Germany, overcoming the external constraint by getting a slice of external demand, became the necessary condition for the expansion of investment in the domestic economy.


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