Pfandbrief literally translates to “collateral letters” in German. We think. It always reminds us of Pfannkuchen (pancakes) though.

Regardless of its literal meaning, the word’s been in the news more than usual recently, thanks to the bailout of Hypo Real Estate.

The German bank was thrown a second lifeline last night after a first rescue package (involving a consortium of other banks pledging to provide liquidity support) fell through. That package broke down, reportedly, after the other banks found out Hypo needed more than the €35bn first discussed. That bring’s last night’s bailout to about €50bn and has left some analysts scratching their heads, with good reason.

There’s an irony here. Hypo was the uber-cheerleader (and issuer) of the ultra-safe German covered bond - the Pfandbrief. It’s funding, like its Pfandbriefe, should have been relatively safe.

Pfandbriefe are more highly regulated and require less leverage than similar commercial mortgage backed securities (CMBS). They also remain on banks’ balance sheets –allowing them to borrow against them.

Thus while CMBS pretty much died in recent credit-crunched months, research from Eurohypo shows that €58.5bn of Pfandbrief loans were issued in the past 12.

As FT Deutschland notes today, Pfandbriefe have also benefitted from an implicit government guarantee that Berlin would never let an issuer fail. We’ve seen that in action over the past week with Hypo.


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