Pfandbriefe: Germany's secret gamblers
Pfandbriefe are asset-backed bonds. But unlike US-style securitizations, the underlying assets remain on the issuing bank's balance sheet. There is no special-purpose vehicle. The Pfandbrief institution is like one big SPV. Its designated mortgage or public-loan assets serve as an undifferentiated pool of collateral for all mortgage or public Pfandbriefe at once. The bank has to manage that pool to make sure its value and cashflows cover all Pfandbrief liabilities.
A trustee appointed by the federal banking supervisor BaKred checks periodically that the collateral is adequate and registers all the assets in the pool. The bank needs the trustee's approval to sell any of those assets.
If the Pfandbrief issuer defaults, Pfandbrief holders have preferential access to the assets in the pool. If the registered collateral is inadequate to meet Pfandbrief liabilities, Pfandbrief holders get equal status with the highest creditors in the queue for the rest of the bank's balance sheet.
In fact, there hasn't been a Pfandbrief default since the instrument was created by executive order of Frederick the Great of Prussia in 1769. In 1897, the sector had its worst crisis.