Interview with vdp Executive Director Jens Tolckmitt

If the heart of the world's covered bond market is the German Pfandbrief (legislative covered bond), the heart of the Pfandbrief may be the vdp (Association of German Pfandbrief Banks).  The vdp's mission includes not only safeguarding the rights and interests of its 35 member financial institutions, but providing advice to governments on covered bond issues.

Jens TolckmittJens Tolckmitt succeeded Louis Hagen late last month as the vdp's Executive Director, after almost seven years as managing director of the Association of Foreign Banks (VAB).  In an exclusive interview with Covered Bond Investor™, Mr. Tolckmitt talks about the push for covered bonds in the U.S., Europe's view of the two American covered bond programs to date, and the vdp's role in helping to develop new covered bond markets outside Germany.

As you know, the idea of trying to start a covered bond market in the U.S. has been around for several years.  Has it been very much a topic of discussion in the European financial community?

Yes.  The idea of actually establishing a covered bond market in the U.S., modeled to some extent after the German or European system, has been welcomed in Europe.   It would be necessary to see the details of any kind of proposition—how it would work—before making an assessment.  But the basic idea I think is very positive.

This is an interesting development, because for a long time the U.S. was closed to any idea of establishing a covered bond system as we know it in Europe.  A closed shop—the simple reason being that you had a very successful funding system for a long time by using securitizations, at least with regard to the volume and share of home loans being funded.

Our association, the vdp, in the past has helped a number of jurisdictions to establish covered bond systems in both Eastern and Western Europe.  We are happy that this idea is now present in the U.S.

What kind of role did the vdp play for those new covered bond markets?

Well, that depends on the country.  After the Iron Curtain came down, we helped in establishing covered bond laws in parts of Eastern Europe.  We had people that have dealt with these issues in the past advising governments on how to do it—or how we did it in Germany—and why we think the German Pfandbrief is as safe and well-regarded as it is. 

That also happened in certain Western European countries later on.  We offered our advice, and in many instances it was taken. 

If you have an established product like the one we have, you also always have an indirect influence by simply having the product and having the legal basis in place which anyone is free to copy.  Or copy and make better.  Or copy and change in those areas where they think it is appropriate.  So there is a direct help by our association and an indirect one by simply providing some kind of role model that has been copied over time.

That's how we see our role, besides promoting the Pfandbrief as an investment worldwide.  We see ourselves as advisors in helping—if someone asks—to establish these kinds of Pfandbrief-like systems in other countries.  

You move a great deal in covered bond circles.  Do you hear more interest from people associated with European banking institutions in the possibility of perhaps getting involved in the U.S. market?  Is there any kind of that talk informally?

Because of the sheer size that a potential covered bond market in the U.S. could have, it is interesting, obviously.  That is clear from the outset.  When and if the U.S. actually establishes a covered bond market, there would certainly be interest from banks dealing today with covered bonds—if from the legal framework it is a product that is similar to what we know here in Europe.

Let's talk a little bit about the covered bonds that were previously issued by Bank of America and Washington Mutual.  In Europe, what sort of view did people in the covered bond community have toward those bonds when they were first issued?

A covered bond, for us, is a bond based on a common legal framework where each issue is highly similar to the next one.  Standardized, so to speak—a homogeneous asset class.  We have a law that stipulates the criteria for Pfandbriefe and the underlying assets, including their supervision.  One of the advantages to the Pfandbriefe—and most of the other covered bonds that have developed here in Europe in the past—is that they are actually based on a very, very strict legal framework that provides safety, transparency, and standardization.

This is not what existed in the U.S. or what was done by the U.S. institutions that you mentioned, which I think was the reason for the skepticism that arose to these bonds. Their issuances were contractual covered bonds whose provisions made them largely similar to securitizations.  And that is not what we would call a covered bond.  I think this is the criticism.

As you know, there has been such a great emphasis in the U.S. on having a maximum number of Americans become homeowners—and the homeownership rate here is quite high.  Do you believe that similarly high ownership rates can be achieved with a covered bond, given that they have not been so high in Europe?

Admittedly, in Germany, the homeownership rate is low—about 43 percent.  But that actually has nothing to do with the Pfandbrief.   Historically, there is a totally different culture in Germany with regard to homeownership.  People have a rental culture, so to speak.  That is no real indication about the usability of the Pfandbrief compared to securitization.

From our current perspective, it's simply quite cheap for people to rent in many cities in Germany.  The relatively low rents compared to buying a house also make people decide not to buy.  In some other European countries there is a strong incentive to buy, simply because rents compared to buying a house are comparatively high.

Of course, rental housing in Germany—including apartment buildings, for example—is also funded by the Pfandbrief.  So the realized potential of Pfandbriefe for financing homes in general—whether they are rented or owned by the people that live in them—is much higher than solely looking at the homeownership rate.

The level of home ownership in Europe varies greatly depending on many factors such as supply and demand, regulation, levels of construction, taxes, and construction costs.  The average homeownership rate was 64% in 2007.  The Southern European countries have the highest levels of owner occupation.  Among the EU 15 countries Spain, Greece and Italy all have owner occupation rates of 80% or more.  In the new member countries of the European Union, ownership levels also tend to be quite high due to the mass privatizations.

Next Wednesday: In the second installment of this three-part series, Mr. Tolckmitt talks about what the U.S. should consider doing in order to build a foundation for a covered bond market in this country.

This interview was adapted from a phone conversation with Jens Tolckmitt earlier this month.