Consistency as a mandate
Speech at the ceremony to commemorate "250 years of the Pfandbrief"
28.11.2019 | Berlin | Jens Weidmann
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1 Introduction
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2 The Pfandbrief as a model of success

3 Monetary policy
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4 Financial stability
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5 Green finance
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6 Capital markets union
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7 Conclusion
1 Introduction
Dr Hagen, Ms Lambrecht, ladies and gentlemen,
Many thanks for inviting me. It gives me great pleasure to be with you today.
Last week, a new exhibition opened at the German Historical Museum here, dedicated to Wilhelm
and Alexander von Humboldt. Wilhelm, the older of the two brothers, is supposed to have said:
"Only those who know the past have a future." It is therefore worthwhile to take a look back at the
past.
We have already learned much today about the genesis of the Pfandbrief. Just over two weeks after
Frederick the Great issued the cabinet order which paved the way for the Pfandbrief, Wilhelm's
brother Alexander, whose thirst for adventure and knowledge holds us in thrall even today, was born.
Alexander von Humboldt was much more than a polymath and scientist. He was also a daredevil for
whom no risk was too great. On the long boat trip along the Orinoco and Rio Negro rivers, his boat
capsized twice in waters infested with crocodiles and piranhas. In the Andes, too, Humboldt narrowly

escaped death when, next to him, a wall of snow suddenly broke off and plunged into an abyss. [1]
The other birthday celebrant has no such tales of derring-do to offer. The Pfandbrief is less about
daredevil adventures and more about consistency and soundness. In this respect, it shares a similar
fate to the Bundesbank: both are regarded as being rather dull.
Boredom is less desirable for a festive occasion such as this, but all the more so for Friedrich

Nietzsche, to whom boredom was a precondition for original thought and productive action. [2]
Central bankers do not find boring to be all that bad, either. As former Bank of England governor
Mervyn King used to put it, "boring is best". With a view to predictable monetary policy, he explained

that "a successful central bank should be boring". [3]
As regards the Pfandbrief, a reputation for being boring is at once a compliment and a seal of
confidence. Once money is put on the table, many lose their lust for adventure.
2 The Pfandbrief as a model of success
Let me begin with this question: what is the recipe for the success that the Pfandbrief has enjoyed
over such a long life?
Its unique selling point is undoubtedly its high level of security: Pfandbrief holders enjoy two layers of
protection against default. That is like circus acrobats who are protected by a net and a safety line -
or someone who wears both a belt and suspenders.
Not only is the issuer liable, but the Pfandbrief is also covered by a pool of assets subject to statutory
quality standards and conservative measures of value. If the issuer becomes insolvent, the Pfandbrief
holders have the right to the cover pool, access to which is denied the other creditors.
This double layer of protection comes with a further advantage: as the cover assets remain on the
issuer's balance sheet, it is in the issuer's own best interest to avoid a creditor default and to handle
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risk-relevant information carefully. Experts refer to this as having "skin in the game". [4] The
expression illustrates that, in the event of a default, the issuer will not get away with his skin intact.
This mitigates the moral hazard of issuing loans without performing due diligence on clients and
sufficiently monitoring them. This incentive problem is often seen as one of the factors leading to the

onset of the sub-prime crisis in the United States. [5] Pfandbriefe can therefore make an important
contribution to financial stability. On the other hand, it is also possible that, in extremis, the issuance
of covered bonds can get out of hand.
What is good for the Pfandbrief holder can put the other creditors of a bank at a disadvantage: the
more covered bonds an institution issues, the more collateral is set aside to cover them - and the

smaller the quantity of unencumbered assets available to cover the rest of the bank's creditors. [6]
Such asset encumbrance must always be kept in mind. (mindestens) This is why transparency is
decisive, and institutions are required to disclose their holdings of encumbered assets. However, the
Bundesbank does not believe that regulatory intervention, such as by setting a cap on asset
encumbrance, is necessary.
What the topic shows us is this: the security of the Pfandbrief is not necessarily identical to the
security of the issuer. And, during the financial crisis, individual issuers did, in fact, encounter severe
distress. This was due, not least, to attempts to use short-term funds to finance long-term business.
However, not a single Pfandbrief defaulted. This is why Jean-Claude Juncker has found that
"[c]overed bonds have proved themselves to be a reliable and stable form of financing, particularly

during the financial crisis". [7]
3 Monetary policy
Ladies and gentlemen,
The Pfandbrief has taken on a greater role in monetary policy implementation in the euro area since
the financial crisis. The Eurosystem has launched three purchase programmes for covered bonds over
the past ten years.
The first two programmes were intended to help restore liquidity in a market segment important for
bank funding. Both had a limited volume and duration and were terminated on schedule.
In that respect, they differ from the third purchase programme, which was launched in October 2014
with the intention of easing the monetary policy stance. In 2015 it became part of the broad asset
purchase programme, or APP, under which the Eurosystem also buys corporate bonds, asset-backed
securities and government bonds. The total volume now comes to more than €2.6 trillion. And the
volume has been growing again since November, as the Governing Council of the ECB decided to
recommence net purchases. Bond holdings are now being increased at a monthly pace of €20 billion.
The purchase programmes have helped prevent the crisis from escalating and have played a role in

the euro area's economic recovery. They can, however, have undesirable side effects as well. [8]
While combating the crisis, monetary policy in a sense followed in the footsteps of discoverers and
explorers such as Alexander von Humboldt. Central banks ventured into what was until then largely
uncharted territory, armed with a raft of non-standard measures, and are still in the process of
exploring this new monetary policy landscape.
It would be premature to make a conclusive judgement about the purchase programmes today. There
has been too little research into the longer-term effects of non-standard monetary policy, in
particular. Recently, my colleague on the Governing Council, Luis de Guindos, rightly called for a
greater focus on the side effects in future. And for a long time now, I have untiringly pointed out this
precise issue.
When it comes to the APP, my main criticism is of the purchase of government bonds in the euro
area. The Eurosystem central banks have now become the countries' biggest creditors. This threatens
to blur the line between monetary policy and fiscal policy.
Additionally, the risks to financial stability may increase as the period of ultra-loose monetary policy
continues. The very low risk-free interest rates make riskier investments more attractive in relative
terms. Many investors on the search for yield may probably be willing to take on more risk, and may
rebalance their portfolios accordingly.
The impact of non-standard monetary policy measures relies to a certain extent on this portfolio
rebalancing by market participants. It ensures that the expansionary stimulus provided by monetary
policy is also transmitted to those areas of the financial system where the central bank is not directly

active. [9] However, it may become a problem if market players take on more risk than they can
bear.
4 Financial stability
Here in Germany, this issue is being discussed not least with a view to the property market. Since
2010, house prices have risen extremely steeply: by just under 60% nationwide and even by close to
80% in urban areas. Healthy economic growth and low interest rates are likely to have been key
drivers of this. And both probably owe something to the accommodative monetary policy.
However, the price rise in German cities was much stronger than appears justified by longer-term
economic and demographic factors. As Bundesbank estimates show, residential real estate in those

areas was overvalued by between 15% and 30% last year. [10]
Now, elevated valuation levels do not represent a threat to financial stability per se - despite the
potential for a setback. Risk can build up in the property market mainly if there is a sharp rise in loans
alongside prices, and banks significantly ease their lending standards at the same time. There is no

sign of such a spiral in Germany at present, however. [11]
But buildings and land also serve as collateral for the stock of loans. In Germany, roughly half of the
bank loans granted to the private non-financial sector are collateralised with real estate. As a result,
overvaluations in the property market could mean that banks overestimate the recoverability of their
loan collateral.
What is more, the long economic upturn in Germany has meant that borrowers generally have better
creditworthiness and fewer loans default. Consequently, banks have been able to scale back their
provisioning for credit risk. Risk provisioning is at a historically low level today, and thus reflects the
exceptionally favourable economic developments of the past. On the other hand, future credit risk
could be underestimated.
All things considered, the German financial system has become more vulnerable to a scenario in
which the economy experiences an unexpected downturn rather than simply treading water for a
time, as is the case now. In such a scenario, more loans could default again while collateral loses
value at the same time. And because of the low level of risk provisioning among banks, the ensuing
losses would hit equity capital sooner.
In order to stabilise their tier 1 capital ratio, the affected banks might restrict lending. And if a large
number of banks simultaneously respond in this way, financing terms would deteriorate further and
the economic downturn would be exacerbated. So, we are dealing here with cyclical risks that are
closely intertwined and could serve to reinforce each other.
"Everything is interaction." Although that sentence could well have featured in our Financial Stability
Review, which we presented last week, it was in fact written by Alexander von Humboldt back in
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1803. [12] Humboldt always took a holistic view of the world, seeking to understand the
interactions around him in order to see the big picture. This is rather like central bankers and
supervisors analysing financial stability as a whole rather than individual institutions.
Action was needed from a macroprudential perspective, and Germany activated the countercyclical
capital buffer for the first time in July. This ensures banks build up additional reserves when times are
good and thus boosts their resilience to periods of stress. When times are bad, supervisors can lower
the buffer again so that banks can then use this leeway to cover their losses. In other words, the
countercyclical capital buffer has a stabilising effect and helps the banking sector to better absorb
shocks.
5 Green finance
Ladies and gentlemen,
Risks, interactions and keeping sight of the big picture are critical factors when it comes to another
topic, too: climate change. When Alexander von Humboldt witnessed the environmental damage
caused by plantations on his travels in Venezuela, he was able to join the dots and warned of the
human impact on the environment and its consequences for future generations. In particular, he
noted the important role played by the forest in cooling the air, storing water and protecting against

soil erosion. [13]
Climate change is a challenge that we all face. Christine Lagarde, President of the ECB, has said that

all public and private institutions should act, within their mandates, to address it. [14]
The first "Grü ner Pfand brief" was issued back in 2015, even before the Paris Agreement was signed.
Without wanting to flatter, it is now safe to say that this product innovation, which was designed to
finance energy-efficient buildings, was a little ahead of its time.
The green bond market as a whole can make a substantial contribution to financing environmentally
friendly projects. In Germany, sustainable investment has risen by over 70% in the past four years.
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What is more, strong market growth can be observed globally as well. [15] And yet the role played
by green finance remains fairly small. Green bonds account for only just 2% of the international
market as a whole. In other words, green finance probably still has considerable potential.
A key requirement here is a clear, generally accepted definition of what "green" and "sustainable"
actually mean. This could also strengthen confidence in green finance, as it would counteract the
effect of "greenwashing". What this means is that a financial product is, for example, marketed as
being green without actually being environmentally friendly.
A variety of standards and principles aimed at preventing such deceptive labelling and providing
investors with clarity already exist. Expanding on this, the European Commission is currently working
on its own classification system. This taxonomy will make it possible to classify sustainable financial
products in a way that is uniform, clear and reliable. It is the centrepiece of the EU's Sustainable
Finance Action Plan and is intended to serve as a reference framework for investors so that Europe
can reach the climate goals set as part of the Paris Agreement.
Central banks are also keeping these goals in mind. (mindestens) For us, this means accompanying
the greening of the financial system, and it involves various areas of central bank activities.
We need to better understand the economic implications of climate change and factor these into our
monetary policy analyses. For example, the growing frequency of extreme weather events could
make inflation and growth rates more volatile or curb potential growth.
Furthermore, climate change or the transition to a low-carbon economy could cause risks in the
financial system to emerge, as underlined by the Bundesbank in its latest Financial Stability Review.
Macroprudential supervisors need to make sure that the financial system is also able to withstand
these kinds of threats.
At the same time, banks need to take adequate account of climate-related financial risks in their risk
management. If financing environmentally harmful projects were to become less attractive as a result,
that would be a welcome side effect. In this context, central banks are needed in their roles as
banking supervisors and are currently hard at work at the methodically challenging task of
conceptualising possible climate stress tests.
But climate-related financial risks can also affect our monetary policy asset purchases. At longer
maturities, in particular, climate factors could influence the default risk of corporate bonds. Insofar as
they are quantifiable, these ramifications should be analysed and factored in.
It is, first and foremost, up to the rating agencies to continue expanding their analytical toolkits so as
to also take adequate account of the climate-related determinants of default risk. The prerequisite
here is transparency.
Our monetary policy asset purchases need to continue to be in line with the principle of market
neutrality - this is derived from the EU treaties and our narrow monetary policy mandate.
A monetary policy which pursues explicitly environmental policy objectives runs the risk of
overextending itself. With that in mind, Chair of the Federal Reserve Board Jerome Powell recently
told Congress: "Climate change is an important issue but not principally for the Fed. [...] That is for

elected officials, not us." [16] Democratically legitimate politicians need to decide on the tools to be
used by our society to combat climate change - and it is also their responsibility.
The Bundesbank can support policymakers in this endeavour, as we manage the assets of various
public authorities. We actively assist the public sector in "greening" its portfolios. Several of those
public authorities have already explicitly incorporated sustainability clauses into their investment
strategies. Our financial market experts have provided them with conceptual support and are in
charge of putting these strategies into practice.
Only recently, the Network for Greening the Financial System, or NGFS for short, published the
Sustainable and Responsible Investment Guide for Central Banks' Portfolio Management. The NGFS
now consists of more than 50 central banks and supervisory authorities spread across five continents
who discuss how the financial system's contribution to the objectives of the Paris Agreement may be
strengthened. The Bundesbank is one of the founding members of the NGFS. International
cooperation, such as this, is imperative for climate action.
6 Capital markets union
The value of cross-border cooperation became evident even during Alexander von Humboldt's first
expedition. His five-year-long trip of America was a research undertaking which succeeded only due
to the involvement of the French doctor and botanist Aimé Bonpland. And upon his return from
Russia, Humboldt founded an association - an international network, if you will - to study the Earth's

magnetic field. [17]
In the case of the Pfandbrief, at least, the European perspective is absolutely essential. This year, for
instance, a legislative framework for covered bonds in the EU was adopted, ensuring a minimum level
of harmonisation based on two building blocks. Not only does this piece of legislation introduce the
"European covered bond" seal of approval, it also flags a premium segment to which the Pfandbrief
of course belongs.
The harmonised definition aims to promote the stronger use of covered bonds as long-term sources
of funding across Europe, enabling investors to reap the benefits of these debt securities on a larger
scale. Because the markets for covered bonds are not all as well developed as they are here. All this
may well provide the German Pfandbrief with a further impulse of internationalisation, following the
initial surge when the Jumbo Pfandbrief was introduced in 1995.
At this point, I would like to add the following remark: The fact that the Pfandbrief became - in Dr
Hagen's words - an "export hit" is not solely attributable to the product itself. It is also a great
achievement of the Association of German Pfandbrief Banks, or vdp, and its sustained efforts at the
national and international level.
The EU framework for covered bonds and the aforementioned taxonomy for sustainability are two
steps towards a real capital markets union. However, it appears that Europe still has obstacles to
overcome on its way to better access to funding and a wider dispersion of risk in the private sector.
In my view, the area of insolvency proceedings could be key to a deeper integration of the European
capital market. This area still lacks a harmonised approach - not least because it is often closely
intertwined with other aspects of national law.
A complete harmonisation of insolvency proceedings is therefore rather unrealistic. However, maybe
that is not necessarily what is called for. Much the same as the covered bond framework, minimum
requirements across Europe would be a pragmatic first step.
A clear and sound legal basis for securities, in particular, is important if we want to protect issuers
and investors. This has also stood the Pfandbrief in good stead.
Time and again, the Pfandbrief has been able to adapt to new circumstances and overcome
challenges over the years. But amidst all the change, it was essential that the Pfandbrief stayed true
to its core brand concept, which was to provide the necessary security for long-term funding and
investment. Going forward, this consistency will continue to be crucial.
7 Conclusion
Ladies and gentlemen,
Do you remember the saying? "Only those who know the past have a future." I would therefore like
to end my speech where it all began, in 1769.
When Frederick the Great issued his forward-looking cabinet order, the world had already been
looking skyward for some days: The night sky revealed something so remarkable that copper
engravings were made to capture the event. What people saw was a large comet with an impressive
tail that caused a sensation even beyond Europe. China's royal astronomers as well as explorer James
Cook, who was sailing the South Pacific at the time, reported sightings.
The data compiled from all the different observations allowed scientists to calculate the orbit of the
comet. It is travelling on a very long elliptical path around the sun. In 1769, it came particularly close
to the sun, which meant that it was easily visible from Earth. We will probably have to wait a
millennium and a half to witness the next one.
I hope the Pfandbrief shows just as much perseverance and wish its makers every success!
Thank you for your attention.
Footnotes:
1. Scha per, R. (2019), Alex an der von Hum boldt: Der Preu ße und die neuen Wel ten; Bier mann, W.
(2008), Der Traum mei nes gan zen Le bens: Hum boldts ame ri ka ni sche Reise.
2. Nietzsche, F. (1882), The Gay Science, Chapter 42 Work and Boredom.
3. King, M. (2000), Monetary Policy: Theory in Practice, speech delivered on 7 January 2000.
4. Demiroglu, C. and C. M. James (2012), How Important is Having Skin in the Game?
OriginatorSponsor Affiliation and Losses on Mortgage-Backed Securities, AFA 2012 Chicago Meetings.
5. James, C. M. (2010), Mortgage-Backed Securities: How Important Is "Skin in the Game"?, Federal
Reserve Bank of San Francisco, Economic Letter, Nr. (Nummer) 2010-37.
6. Ahnert, T., K. Anand, P. Gai and J. Chapman (2019), Asset Encumbrance, Bank Funding, and
Fragility, Review of Financial Studies, Vol. (Volume) 32, pp. (pages) 2422-2455.
7. Juncker, J.-C. (2019) in 250 years of the Pfandbrief: Interview with Jean-Claude Juncker,
https://www.pfandbrief.de/site/en/vdp
/pfandbrief/anniversary/250th_anniversary/vdpsaysthankyoufritz/juncker.html
8. Lewis, V and M Roth (2017), The financial market effects of the ECB's asset purchase programs,
Deutsche Bundesbank Discussion Paper No 23/2017.
9. Deutsche Bundesbank (2016), The macroeconomic impact of quantitative easing in the euro area,
Monthly Report, June 2016, pp. (pages) 29-53.
10. Deutsche Bundesbank (2019), Housing prices in Germany in 2018, Monthly Report, February 2019,
pp. (pages) 53-55.
11. Deutsche Bundesbank (2019), Risk situation of the German financial system, Financial Stability
Review 2019.
12. von Hum boldt, A. (1803), Rei se ta ge buch 1.-5. Au gust 1803, Tal von Me xi ko.
13. Wulf, A. (2016), Alex an der von Hum boldt und die Er fin dung der Natur, Pen gu in Ver lag und C. Ber
tels mann Ver lag, Mün chen, p. 24.
14. European Parliament (2019), Draft report on the Council recommendation on the appointment of
the President of the European Central Bank, Committee on Economic and Monetary Affairs, 29
August 2019.
15. Deutsche Bundesbank, The sustainable finance market: a stocktake, Monthly Report, October
2019, pp. (pages) 13-32.
16. Powell, J. in Financial Times, Lagarde push for climate change to spearhead policy in ECB review,
28 November 2019.
17. Ho nig mann, P. (1984), Ent ste hung und Schick sal von Hum boldts Ma gne ti schen „Ver ein" (1829-
1834) im Zu sam men hang mit sei ner Ru ß land rei se, An nals of Sci ence, Vol. (Volume) 41 (1),
pp. (pages) 57-86.