Thomas Jordan: Funding mortgages - securitisation and pfandbriefe in
the light of the financial crisis
Summary of a speech by Mr Thomas Jordan, Member of the Governing Board of the Swiss
National Bank, at the annual general meeting of the Pfandbriefbank Schweizerischer
Hypothekarinstitute, Zofingen, 15 May 2008.
The complete speech can be found in German on the Swiss National Bank's website (www.snb.ch).
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The funding of mortgages is the focal point in discussions on the causes of the international
financial crisis. The massive credit expansion in the US, particularly in the area of sub-prime
mortgages, reinforced and prolongued the US real estate bubble. From mid-2007, the value
of financial products backed by sub-prime mortgages declined substantially, leading to heavy
losses on the part of banks and investors. The problems encountered with these financial
products gave rise to discussions on the future of mortgage funding. The danger of such
discussions is that the problems inherent in different instruments could be confused and their
economic benefits overlooked.
Three different refinancing instruments can be differentiated: pfandbriefe, mortgage-backed
securities (MBS) and structured securitized products. Common to all three is that they make
it possible to refinance mortgages, and ease the process. However, they differ with respect
to risk transfer. While the credit risk remains with the bank when refinancing via pfandbriefe,
it is passed on to the investor in the case of MBSs and structured securitized products.
In mid-2007, serious problems with structured products backed by sub-prime mortgages put
an abrupt stop to the boom in securitisation. False incentives, inadequate control
mechanisms, shortcomings in the rating system and insufficient personal responsibility on
the part of investors were the main criticisms aimed at securitisation practices. What is
important now, is to correct these deficiencies, so that the trust of market participants in
these products can be restored. It would be wrong to ban the securitisation of mortgages,
since these refinancing instruments generate substantial economic benefit and are an
indispensable part of our modern financial system.
The mortgage securitisation weaknesses revealed in the financial market crisis do not apply
in the case of the Swiss mortgage bond. Consequently, it should definitely have the potential
to play an even greater role in maturity-matched refinancing of mortgages in Switzerland in
the future. In addition, banks can improve their liquidity by holding portfolios of Swiss
mortgage bonds themselves. Mortgage bonds could be converted into liquidity quickly and
simply, as required, by means of repo transactions - either in the Swiss franc interbank
market or at the SNB.