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A German view on Irish mortgage bond proposal Back  
Finance spoke to Frank Damerow, fixed income strategist in international markets at HypoVereinsbank in Munich and Dieter Heusel, managing director of HypoVereinsbank Ireland on the potential for Irish ‘Pfandbriefe’.
Q: Is there potential for a significant Irish mortgage bond market?

FD: Market cap by nature will never reach dimensions such as Germany, simply because of the asset base. Nevertheless, Ireland would follow other countries, such as Finland, in adopting the ‘on-balance’ sheet securitisation process successfully marketed by German mortgage banks. ‘On-balance sheet’ securitisation provides for a funding advantage and thus a competitive advantage for the issuer on the back of a legal framework which grants bondholders a maximum degree of security through the legal set-up and tough restrictions on the asset side.

DH: There is a potential for a significant market. It is well known that the Luxembourg government established a new Pfandbrief law which is not as stringent as the German one. A lot of banks (HVB Group included) established subsidiaries will the idea of benefiting from the Luxembourg model. The Irish market has to be competitive within the eurozone.

Q: What would be the most useful result of a functioning market?

FD: It would allow Irish banks to pass on the funding advantage to prime mortgage lenders and offer new forms of loans. For banks on the funding side, they are likely to be found on the structured side because of the limited collateral potential, benchmarked against German Pfandbriefe, if marketed internationally.

DH: The possibility of cheaper long-term finance could make future and investment planning easier.

Irish/international banks, in raising this type of funding, could become more competitive, particularly in longer term lending. The banking sector could grow as appetite develops due to improved competitiveness combined with the security offered by a Pfandbrief law similar to that in Germany.

It would offer a better refinancing basis for all banks which are able to issue Pfandbriefe. It is currently an open question as to whether or not all banks could benefit or ‘only’ specific banks. The German Mortgage Bank Act guarantees quality by limiting issuer activity on the asset side. Therefore only specific banks have the right to issue Pfandbriefe.

Q: Are there disadvantages? What should the Irish Government look at?

FD: There are no real disadvantages, but it is quite unlikely that the market will ever turn out to be a deep, broad and liquid market. It is just another framework among those that have been existing for a long time, revitalised or newly established, each one of them with slightly different nuances. From a portfolio perspective, the product should be interesting, if priced correctly. Today, the structure of Pfandbrief -like products is well known and thus information costs for investors are limited.

However, the Irish framework most certainly will not be a serious competitor to heavily competing frameworks, such as the ones of Germany, France and Luxembourg. These frameworks all draw from a huge asset base within the EEA, and even the OECD in the Luxembourg case, on the mortgage and public sector loan side. They can be big and liquid, as the German Pfandbrief market already is, with a total outstanding volume of more than ?1 trillion. These markets clearly will attract international investors, particularly given index considerations.

DH: The Irish Government should compare the Pfandbrief laws within the eurozone and the implications for their particular economies. This would include market security, benefits for companies and the retail market, impact of long-term interest development, the possibly strong influence on investments within the Irish economy (including PPP), budgetary implications.

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