(Bloomberg) -- Germany’s financial regulator BaFin is taking a closer look at the real estate used by lenders to secure covered bonds known as Pfandbriefe, a €400 billion market traditionally considered among the safest in credit.

While the watchdog conducts such cover audits every three years, the current reviews are notable because of their level of scrutiny, according to people familiar with the matter.

BaFin’s probe is focusing on the banks with the largest exposures and its findings so far haven’t revealed any significant issues, said the people, asking for anonymity discussing internal information.

German lenders piled into domestic and international commercial real estate lending over the past decade, before the sudden increases in interest rates hit prices and caused property developers to default. The market jitters have been particularly painful for specialized real estate lenders such as Deutsche Pfandbriefbank AG, which last month scrapped its dividend to shore up its finances.

A spokesman for BaFin declined to comment on individual banks or probes. The watchdog is monitoring market developments and “closely accompanying banks with high commercial real estate exposures,” the spokesman said.

Pfandbrief bonds are considered among the safest in the world. They haven’t shown the kind of swings seen in other bank debt following this year’s turmoil on commercial real estate markets.

The VDP Association of German Pfandbrief Banks says on its website that this type of bond has a “spotless credit history.” The debt was pioneered in 18th-century Prussia, when King Frederick let aristocrats raise money by pledging their estates as collateral.

The volume of Pfandbrief debt outstanding rose to slightly more than €400 billion ($426.3 billion) last year for the first time since 2014, according to data from the VDP, which has 52 members.

Deutsche Pfandbriefbank, or PBB, is among the largest issuers and relies on the debt as its primary refinancing instrument. Earlier this year, PBB was at the center of concerns that troubles in US property markets are spreading to Europe. The German lender saw its shares and bonds touch record lows before opting against paying a dividend for last year.

An official for PBB declined to comment on any BaFin probes, as did a spokesman for the VDP lobby group. 

“Property values, especially for offices, will likely decline further, posing a challenge for real estate investors and lenders,” said Mathias Pleissner, deputy head of covered bonds at Scope Ratings. While the banking system will probably avoid a crisis, risks to domestic commercial real estate will remain a focus for Pfandbrief lenders, given more than half their office exposure is in Germany, he said.

Pfandbrief issuers use a conservative long-term valuation approach and generally only include the portion of loans that are last in line to take losses, the spokesman for the lobby said. Loans securing Pfandbriefe often only amount to 40%-50% of the market value of a property, he said. 

BaFin’s probe is part of a broader effort to get a handle on potential fallout from the global commercial property meltdown. Mark Branson, the watchdog’s president, has named risks arising from corrections on real estate markets as a key area of focus this year. 

While many banks are benefiting from a temporary boom in lending revenue from higher interest rates, “not all negative effects of the interest rate increase have been felt yet,” he said in January.

--With assistance from Laura Malsch and Helene Durand.

(Updates with analyst’s comment in 11th paragraph)

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