G. F. Doll - Analysis of the relationship between the quality of cover pools and the yields of public German Pfandbriefe
Public Pfandbriefe stand for covered bonds, which are secured by claims against public sector bodies. The entire issue of Public Pfandbriefe of a particular Pfandbrief bank is collateralized by that institute public cover pool. The cover pool quality is determined by the value of the underlying assets. For the Public Pfandbriefe, it corresponds to the credit standing and credit quality of the respectively funded public-sector bodies.
The present work analyses the sovereign risk exposure in cover pools of particular Pfandbrief Banks over the five-year period 2006 to 2010. Beyond the statutory present value method, an evaluation of sovereign risk exposure is carried out by using additional capital market information (credit default swaps).
The results of the initial period 2006/2007 reveal that the valuation losses compared to cover pool sizes are still negligible. However, at the end of the analysed period (i.e. end of 2010), the legally prescribed overcollateralization of 2 % was insufficient to fully cover correspondent losses in four observed Pfandbrief banks. This indicates that in certain market phases the sovereign credit risk exposure cannot be fully offset by the legally required net present value cover. Furthermore, it is being examined whether Pfandbrief holders recognize and valuate different qualitative configurations of public cover pools represented by individual banks. In order to test whether a high-quality cover pool will lead to lower yield spreads for public Jumbo Pfandbriefe for a Pfandbrief bank, linear regressions in form of cross-sectional analysis is performed on a monthly basis. It shows that only towards the end of the analysed period the valuation of sovereign risk exposure in the cover pools provides a significant contribution to explaining the level of swap spreads. Nonetheless, accompanying empirical analysis (LSDV-Regressions) over the entire period indicates that the valuation of cover pools does not have a significant effect on the absolute Jumbo Pfandbrief spreads over time. Those are rather influenced by macroeconomic factors and reflect the risk perception of the entire market.
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