Innovations in financial institutions funding: structured covered bonds in Germany

Christian Alexander Mecklenburg-Guzmán, LLM, cmecklenburg@mayerbrown.com

Introduction

Covered bonds issued by financial institution and are characterised by offering investors full recourse to the issuer and an ‘insolvency remote’ segregated cover pool of assets (together ‘dual recourse’) in the event of default of the issuer. Pfandbriefe, regulated covered bonds governed by German law, are part of a longstanding tradition in Germany and are widely accepted by foreign investors.[1] The statutory covered bond regime creates certainty for investors as the banks allowed to issue Pfandbriefe have to meet strict rules and are subject to especial regulatory scrutiny. Hence, Pfandbriefe give investors a special priority and can be thus considered as high quality debt awarded high credit ratings which consequently can be sold at discounted interest rates to a broader base of private investors subject to regulation and public bodies.[2]