Pfandbrief banks welcome law amendment to safeguard Pfandbrief business in UK after Brexit

Germany’s Pfandbrief banks have welcomed the law amendment to safeguard Pfandbrief business in the UK after Brexit, following the Bundesrat’s adoption this month of the Tax Act relating to Brexit.

The move is designed to ensure theeligibility of assets in the UK as cover assets and provides forgrandfathering and new lending.

‘It’s what we were hoping to see,’ Walter Allwicher, head of communications at pbb Deutsche Pfandbrief Bank, told REFIRE. ‘It secures us being able to fund our UK business via Pfandbriefe, so the status quo is maintained.’

The Act contains amendments to the Pfandbrief Act which ‘safeguard the seamless continued eligibility of British assets as cover for Pfandbriefe after the UK leaves the EU’, according to the Association of German Pfandbrief Banks (Vdp). As such, it has been formulated in such a way that even if the Brexit date is postponed, the grandfathering of all cover assets located in the UK will apply. The inclusion of the United Kingdom of Great Britain and Northern Ireland in the Pfandbrief Act as third countries also means that new lending business there will be regulated by the same provisions as for third countries such as Switzerland, the US, Canada and Japan, according to the Vdp.

‘From the vote onwards, we have said that we need an explicit statement in the Pfandbrief Act that UK-related lending business will seamlessly remain eligible as cover for Pfandbriefe after Brexit, which should apply to existing and future business,’ Jens Tolckmitt, CEO of the Vdp, told REFIRE.‘The government has moved very quickly and farsightedly on this and the law is now in place, which means that business can now be refinanced in the UK via Pfandbriefe without interruption post-Brexit. This enables Pfandbrief banks to profit from their attractive refinancing conditions, keeping their traditional competitive edge.’

Outstanding commercial mortgage loansfrom German Pfandbrief banks in the UK totalled €21b at the end of last year, of which €4b came from new business in 2018, according to the Vdp.

Earlier drafts of the Tax Act relating to Brexit already envisaged grandfathering for mortgages in the United Kingdom that are included in cover on the Brexit date, according to the Vdp. The provisions governing new lending business were originally to have been implemented in the Act on the Further Implementation of the EU Prospectus Regulation, which will not be put to the vote until early this summer. This would have meant that new mortgages in the UK could not be included in cover between the Brexit date and the entry into effect of this law.

This month’s adoption of the Tax Act relating to Brexit means that the following specific amendments have been made to the Pfandbrief Act: inclusion of the UK in the cover requirements with regard to statutory overcollateralization; safeguarding of the protection under grandfathering rules of cover assets in the countries mentioned insofar as such protection is not covered by the first point; provision to the effect that assets included in cover up until the Brexit date are not to be applied against the 10% threshold for cover assets outside of the EU, in the case of which the safeguarding of the preferential right in insolvency has not been clarified; stipulation of the scope of the legislation, i.e. the provisions will apply as soon as the UK has withdrawn from the EU, irrespective of when Brexit actually occurs, according to the Vdp.

However, many lenders remain cautious about lending in the UK due to Brexit uncertainty, including pbb. ‘We have lent less in the UK during the past two years due to Brexit uncertainty,’ Allwicher said. ‘Last year, 11% of our new business – or around €1b – was in the UK, down from 13% in 2017 and 18% in 2018. This year, we will continue with our careful and selective approach in the UK.’

For Bodo Winkler, head of funding and investor relations at Berlin Hyp, the tax amendment will have a limited impact because the bank has been decreasing its exposure to the UK over the past five years. ‘Today, in our mortgage cover pool, there is only about €200m in the UK, which is less than 2% of our €14b pool,’ he told REFIRE. ‘However, the Bundesrat’s move is important for institutions who have more than 10% of their cover pool in the UK because it gives security to banks who have large exposures in the UK. We are not allowed to have more than 10% exposure to certain countries, such as Switzerland and Norway (i.e. third countries), in our cover pool.’

Tolckmitt said it is understandable that lenders have been cautious over the past year ‘because we still don’t know what shape Brexit will take or what the ramifications will be’: ‘The amendment to the Pfandbrief Act which has been implemented within the recent Brexit-related Tax Act doesn’t have a cut off point for Brexit, so whether it happens this month or a long time from now, the amendment is still valid. It only kicks in if Brexit actually happens, so if Article 50 is revoked, it won’t affect the law.’

And how enticing the UK is to lenders going forward will depend significantly on how Brexit pans out, Winkler said. ‘Our position on the UK has not changed over the last three years,’ he said. ‘We used to have an office there but we closed it in 2012. We were considering getting back into the market in 2016 but then Brexit was decided. We haven’t done any business there, other than some extensions. The UK will remain an interesting market but only once we know how the relationship between the UK and the EU is properly defined.’ (ssk)