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Western EuropeJune 1 2004

Germany’s VDH takes control of European covered bonds dispute

German mortgage banks are campaigning to develop a common legal definition and standard for covered bonds. The dispute was sparked last year by three UK banks issuing covered bonds which do not legally qualify as this asset class.
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The confusion began when in the spring of 2003, HBOS, Northern Rock and Bradford & Bingley issued what were heralded as the nation’s first covered bonds. Yet because they were issued under UK bankruptcy law and not under a special European Union directive pertaining to covered bonds, they cannot be legally treated as covered bonds. Since the UK is a Union member, EU law supercedes that of the UK.

The three banks were not perturbed by the discrepancy, noting that the UK law afforded their bonds’ investors even more protection than the EU directive. However, the situation has offended the sensibilities of German mortgage banks, whose covered bonds, called Pfandbriefe, account for two-thirds of the €1500bn market for the asset class.

As a result, German mortgage bank association VDH will in November help establish a round table for European issuers of covered bonds to agree what exactly a covered bond is and what standards it should uphold. In creating the round table, called the European Covered Bond Council, VDH is being assisted by the European Mortgage Federation (EMF), a Brussels lobby that represents European mortgage banks.

Speaking at a press conference, VDH managing director Louis Hagen said he would argue before the council that all issuers of covered bonds must issue in accordance with the EU directive, or otherwise they cannot be marketed as such. It remains to be seen how UK banks, which have been invited to participate, will react to this.

Asked if the European Covered Bond Council would eventually lead to the creation of a pan-European covered bond, Mr Hagen replied that this was a distinct possibility. However, this was dependent on reaching agreement on the issues raised by VDH, he added.

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Read more about:  Analysis & opinion , Western Europe , Germany