German mortgage banks - financial services providers for Europe

A graphic will soon be available at: "Continuous and high growth rates have characterised the European operations of the German mortgage banks in recent years," said Dr. Karsten von Köller, President of the Association of German Mortgage Banks and Member of the Managing Board of RHEINHYP Rheinische Hypothekenbank AG, Frankfurt, on the occasion of a press conference staged by the Association in Brussels. The aggregate volume of loans had risen more than four-fold within the space of only two years, from 12 bn Euro in 1997 to approx. 67 bn Euro in 1999. This was almost 8 % of the entire volume of lendings by the mortgage banks. Von Köller went on to say that the predominant field of business was public-sector lending, i.e. lending activities with EU member states, their regional governments and their cities, towns and municipalities. As at end-1999 these accounted for some two thirds of the lending volume, or 42 bn Euro. The most important market with a lending volume of more than 10 bn Euro were Italian public-sector. Yet the mortgage banks had also gained a firm foothold on all the major property markets of the EU. Of an aggregate lending volume of a good 15 bn Euro, Great Britain was the most significant market with a volume of 6,3 bn Euro. The main focus of property finance was on the financing of commercial properties such as, for example, office and administration buildings and retail premises. No European harmonisation of the mortgage loan Whereas the single European market was increasingly becoming reality for the commercial investor - von Köller went on - sizeable obstacles still stood between the single market and the consumer. As an example he cited the typical product of the German mortgage banks, property loans with a long-term fixed-rate agreement. These could not be offered in a number of EU countries because the national consumer protection regulations - unlike in Germany - did not allow the possibility to repay at any time. This meant, he argued, that consumers were unable to profit from the advantages of product diversity in Europe because they did not have free access to all products. Von Köller said that for this reason the Association was opposed to a European harmonisation of the mortgage loan, explaining that this would destroy product diversity, restrict competition and would ultimately be disadvantageous for the consumer. Instead - provided the consumer was properly informed and the product transparent - the consumer who was, after all, of age should be left to decide for himself. The Pfandbrief - Europe's largest capital market segment Only the market segment of the Jumbo Pfandbriefe - von Köller continued - reached, with more than 300 bn Euro, a size that made it one of the largest bond markets of the Eurozone. He explained that Jumbo Pfandbriefe were the liquid segment of the Pfandbrief market, the high liquidity being guaranteed by large issue sizes - on average, the volume of outstanding Jumbos was 1.1 trillion Euro - and by the market-making pledge by at least three syndicate banks participating in the issue. Pfandbriefe and Pfandbrief-type products, von Köller said, were widely spread throughout Europe. In the European Union during the last few years new mortgage bank laws had been put into effect in Luxembourg at end-1997, in France in mid-1999 and in Finland at the start of this year, while similar pieces of legislation were in the works in Belgium and Ireland. This development could only be welcomed from the German mortgage banks' point of view since it was enhancing the depth and the liquidity of the market. As a result, the conditions for investors would improve, and the attractiveness of the market would rise as a whole. Another positive factor in this respect was that the different products had individual risk/earnings profiles. Ultimately, the "competition of the systems" would reveal which product was wanted by the market. Mortgage loan and Pfandbriefe should not be omitted from the EU Solvency Ratio Directive Von Köller found it astonishing that the EU consultation paper concerning the capital adequacy rules for banks failed to mention the mortgage loan at any point, although this loan type accounted for no less than 40 % of the aggregate volume of lendings by the European banking industry. As a result of this shortcoming, the banking industry was being left in the dark in an important business area as to thoughts on the regulatory treatment of the mortgage loan in future. Von Köller went on to say that following last year's EU Solvency Ratio Directive it was currently possible under certain conditions to back the commercial mortgage loan in Europe with only half the 8 % applicable to normal risks. This reflected the outstanding safety of commercial financings. Only recently, new studies showed that the loss rates in the case of commercial property loans were just as low as those in residential building and several times lower than for unsecured consumer loans. This was why the Association was pressing for half the normal weighting to be retained. The demands addressed to the Basle Committee and EU legislators, von Köller continued, included that the mortgage collateral be included in the so-called internal rating systems in view of plans to determine the loan risk, and with it the amount of capital backing, by way of the rating. But because it was a proven fact that real-estate secured loans entailed a very low loss risk, this should be honoured by a low capital backing requirement. Von Köller warned against treating Pfandbriefe and Asset Backed Securities in a way that would distort competition. Although EU proposals on the weighting of ABS made no reference to Pfandbriefe, he stated that they were clearly influenced by the Basle Committee's approach which, in turn, reflected the American mind-set. If Pfandbriefe were weighted at 20 % in future, like the ABS, instead of at 10 % as they currently were, this would ignore the high degree of safety of the Pfandbriefe, issuance of which was governed by a strict legal framework. In so saying, von Köller made clear that this did not mean Germany was pleading its own special case, but that other European countries also provided for a 10 % weighting of their Pfandbriefe. ots Originatextservice: Association of German Mortgage Banks Internet: Contact Association of German Mortgage Banks Holbeinstr. 17, 53175 Bonn Tel.: (49) 228 95 90 2-0 Fax: (49) 95 90 2-44 Press Department: Franz-Josef Arndt (Tel.: 49 228 95 90 2-46) E-Mail: Jens Tolckmitt (Tel.: 49 228 95 90 2-62) E- Mail:

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