Bank equity seen above 10%, Pfandbrief as RE model

Equity capital ratios of the global banking system will, in the aftermath of the financial crisis, rise to at least 10% of total assets and in the longer term even higher, while securitised financing for real estate will increasingly move toward the German Pfandbrief system with tight rules for eligibility, keeping loans on balance sheet, says a new study for the German Pfandbrief Banking Association (VDP). It compares security aspects of Pfandbrief with mortgage backed securities and collateralised debt obligations. "Very quickly it became apparent that the construction of these instruments had inherent weaknesses, particularly in crisis situations," it concluded. The most severe were absence of responsibility for portfolios taken out of bank balance sheets, strong incentives for US mortgage brokers securitise mortgage loans in large volume, and a conflict in the rating process where agencies involved in structuring were also responsible for the security assessment.