This page updated regularly deals with securitization developments in Germany. If you have any news or development to contribute to this, please write to me.

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Tax law changes in 2003:

Tax law changes are expected in 2003 which will make SPVs tax neutral. See an article on this here.

More market information: see our news pages

Market data for 2000/ 2001:

The German securitization market in terms of volumes declined in 2001: from a volume of Eur 7 billion in 2000 to approx Eur 5.5 billion in 2001. However, this should not dishearten, as German banks and mortgage lenders have taken to more of synthetic securitisation which is unfunded in nature. Therefore, a notional volume of some Eur 15.5 billion was hidden in synthetic deals in 2001. Leading German bank KfW initiated two synthetic securitisation programs: Promise and Provide in 2001.

Germany is Europe's largest economy. With approximately DM1.9 trillion of mortgages, thousands of banks, and some of the world's most powerful and sophisticated industrial and service corporations, and all the more, one of the leading financial centres in Europe, it should only be surprising that Germany should rank at place 3 in European securitization market. However, Germany has a very old and well established Pfandbriefe market, an instrument that in many respects fits the bill for US-style mortgage securitization. However, Pfandbriefes are not considered the same as mortgage pass throughs. Pfandbriefes are on-balance sheet instrument which carry a claim both against the mortgage originator as also against the underlying mortgages.

On this site, we do not include pfandbriefe volumes or activity.

 The Bundesaufsichtsamt fhr das Kreditwesen, the German Supervisory Authority for the Banking and Capital Markets Industry has passed a rule which gives securitizations their official blessing and will contribute to the acceptance of securitization as an effective commercial law financing instrument under German law.

German law on securitisations:

On May 20 1997 the German Banking Supervisory Authority (Bundesaufsichtsamt für das Kreditwesen or BAK) published a 'Circular Regarding the Sale of Customer Receivables of Credit Institutions in Connection with ABS Transactions' under cover of an explanatory side letter. The stated purpose of the Circular is to provide credit institutions with planning and legal certainty in respect of central questions concerning ABS transactions and to enable their completion without the prior involvement of the BAK.

Although it does not cover all questions arising in connection with ABS transactions, the circular provides banking supervisory guidance on two central issues:

* the possibility of relief under the own funds requirements of the originator; and

* safeguarding the interests of the debtors of the receivables sold, particularly data protection and bank secrecy.

The structure for ABS transactions envisaged by the Circular was developed in consultation with representatives of domestic and foreign banks. In this way, the UK and US experiences with ABS transactions, particularly credit enhancements and financing of the SPV, have found their way into the Circular to varying degrees. Nonetheless, German regulators remain cautious in respect of own funds relief for credit institutions.

ABS definition

The Circular defines ABS as "securities and certificates of indebtedness representing payment claims against a special purpose vehicle (SPV) serving exclusively the purposes of the ABS transaction". The payment claims are 'backed' by a pool of uncertified receivables ('assets') which are transferred to the SPV as security, principally for the benefit of the holders of the ABS. The qualification 'uncertified' was added to the draft Circular at the behest of the association of foreign banks in order to exclude from the scope of the Circular transactions whereby certificated securities are repackaged in ABS transactions. For banking supervisory purposes the BAK will not distinguish between SPVs with company structures and SPVs with trust structures.

Own funds requirements

In accordance with the EU Directive (89/647/EEC) on a solvency ratio for credit institutions, the Own Funds Principle I (Grundsatz I or Principle I) which amended Sections 10 and 10a of the German Banking Act (Kreditwesengesetz or KWG) requires that at least 8% of a credit institution's risk assets must be backed by own funds. In principle, banking customer receivables are treated as asset items (Principle I Paragraph (3) No. 4). The Circular now makes clear that ABS transactions allow credit institutions to effectively remove customer receivables from their balance sheets and from the application of Principle I, by selling them to an SPV. Such receivables will no longer be treated as risk assets of the selling credit institution, not even as off-balance sheet risk assets, provided no counterparty or market risks regarding such receivables are retained by the selling credit institution (Principle I Paragraph (4) No. 1h).

This will be the case if the following prerequisites are met:

* There must be legally valid transfer of the receivables to the SPV (a 'true sale').

* Recourse against the originator must be limited to liability for the legal existence of the receivables sold or their compliance with eligibility criteria set forth in the purchase agreement — eg that they are free of rights of third parties.

* There must be no substitution by the originator of receivables sold to the SPV, other than substitutions for non-compliance with the contractually agreed eligibility criteria.

* A repurchase of the receivables sold to the SPV is only permitted for the purposes of finalizing the transaction and is limited to a rest-portfolio of less than 10% of the receivables sold to the SPV at their then current value.

* Subject to the exceptions in the box (see above), neither the originator nor any of its affiliates must participate in the financing of the SPV during the transaction. In this context, 'affiliates' means credit institutions, financial institutions or enterprises engaged in ancillary banking services in which the originator directly or indirectly holds at least 40% of the capital shares or which are controlled subsidiaries of the originator (Section 10a KWG). 'Financing of the SPV' refers to any provision of financial means to the SPV during the transaction in the broadest sense, including the simple obligation to provide the SPV with financial means or the giving of a similar undertaking. The purpose of this regulation is to ensure that the credit risks transferred to the SPV do not fall back onto the originator in a different form.

* If originators assume the placement risk of the ABS in a firm commitment underwriting, relief under Principle I will only be available to the extent that the ABS underwritten by the originator are completely placed on the market, or after the originator's underwriting obligation has expired.

It is unclear whether all ABS must be placed before the originator receives relief under the Own Funds Principle I or whether such relief is granted to the extent that ABS are placed in the market. The latter interpretation would more accurately reflect the risk profile of the originator.

* Purchases of ABS by the originator in the secondary market must be at the current market price and must not involve the granting of credit to the SPV or the investors. Securities purchased by the originator must be backed by own funds in accordance with Principle I.

* Originators must take adequate measures to prevent any de facto obligation to assume economic responsibility for the receivables sold in the ABS transaction from arising, eg in the form of market pressure. In particular, the Circular requires that there be no corporate group, company law, capital or personal connection between the originator and the SPV or the trustee/collateral agent holding title to the receivables and other security in a fiduciary capacity. Nor must the name of the originator be similar to or identical with the name of the SPV. Finally, the ABS sales prospectus must indicate clearly that only the SPV is liable for claims of investors and that a guarantee obligation of the originator exists only to the extent expressly undertaken by it.

Retained market and liquidity risks must be backed by own funds, but it remains unclear which own funds requirements will be applied by the BAK in such cases.

Selection of receivables

On the assumption that the sale and transfer of high quality receivables in an ABS transaction may cause the risk profile of the originator to deteriorate, the BAK requires that the receivables be selected randomly from the originator's receivables portfolio. The random selection may, however, be made from those receivables satisfying certain contractual eligibility criteria. The auditor's report on the audit of the annual accounts of the originator must comment on any material deterioration of the portfolio caused by an ABS transaction and the BAK will assess whether 'special circumstances' (Sonderverhältnisse) within the meaning of paragraph 2 sentence 3 of the preamble of Principle I exist, requiring a revision of the own funds assessment. Because no precedents exist, it is unclear what own funds requirements will be imposed on an originator by the BAK in such cases.

Notification to the debtor:

To facilitate ABS transactions by credit institutions, the Circular provides that no consent from the debtor of the receivable is required for the transmission of data:

* which is required to identify and legally enforce the receivable transferred, provided such data are encrypted in the declaration of transfer, the encryption key being deposited under seal with a neutral party, ie either a notary or a domestic credit institution supervised in accordance with the EU Banking Directives and having its seat in another member state of the EU, or in a state party to the Convention on the European Economic Area;

* the transmission of which to a third party (rating agency, auditor, trustee) in connection with the ABS transaction is absolutely indispensable for technical reasons and whereby the identity of the customer is not disclosed. Such third persons must be obliged to ensure confidentiality.

Furthermore, the Circular provides that no consent from the debtor of the receivable is required if the originator itself services (collection by debit authorization) the receivable transferred in the ABS transaction in the capacity of service agent, because in this case customer-related data is not transmitted. The guidance provided by the Circular for cases in which the originator is replaced by a new service agent — for example because of its insolvency or a serious default of its contractual obligations under the servicing agreement — is limited to requiring that the new service agent must be a domestic credit institution, an EU credit institution or an EEA credit institution. Clearly customer data must be transmitted in such cases to allow the receivables to be collected; however, the legality of such a data transmission is at present not settled.


The 1998 Circular modifies the 1997 Circular, makes it inapplicable to revolving securitisations:

Added on 24th March, 1999

In a new circular no. 13/98 dated August 25, 1998, the German Banking Supervision Authority significantly limited the scope of ABS transactions of credit institutions. The new Circular clarifies that the Circular no. 4/97 [see above] does not cover "revolving ABS transactions". A revolving transaction is one where a fixed volume with fixed maturity is backed by a pool of collateral comprising receivables of varying amounts and variable maturity periods. During a specified time, the investors merely receive interest payments, and the principal amoritisation is revolved or reinvested. A bullet payment is received at the end of the maturity period.

Added on 2nd June, 1999:

Pfandbrief: the German Securitisation instrument:

Pfandbriefe are asset-backed bonds. But unlike US-style securitizations, the underlying assets remain on the issuing bank's balance sheet. There is no special-purpose vehicle. The Pfandbrief institution is like one big SPV. Its designated mortgage or public-loan assets serve as an undifferentiated pool of collateral for all mortgage or public Pfandbriefe at once. The bank has to manage that pool to make sure its value and cashflows cover all Pfandbrief liabilities.

A trustee appointed by the federal banking supervisor BaKred checks periodically that the collateral is adequate and registers all the assets in the pool. The bank needs the trustee's approval to sell any of those assets.

If the Pfandbrief issuer defaults, Pfandbrief holders have preferential access to the assets in the pool. If the registered collateral is inadequate to meet Pfandbrief liabilities, Pfandbrief holders get equal status with the highest creditors in the queue for the rest of the bank's balance sheet.

In fact, there hasn't been a Pfandbrief default since the instrument was created by executive order of Frederick the Great of Prussia in 1769. In 1897, the sector had its worst crisis. Three Hypotheken banks which had participated in, as well as financed, housing developments went bankrupt when property prices collapsed. Deutsche Grundschuldbank defaulted on its bonds – it had issued no Pfandbriefe. Preußische and Pommersche Hyp met their Pfandbrief liabilities, but shareholders lost all their capital.

So popular are jumbo Pfandbriefe among international investors nowadays that the Pfandbrief market is the seventh-biggest bond market in the world. About Dm1.8 trillion ($1 trillion) in Pfandbriefe are outstanding