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Carving Out Legacy Assets: A Successful Tool for Bank Restructuring?

15-03-2017

This briefing drafted under supervision of the Economic Governance Support Unit reviews the options for a separation of non-performing and other problematic assets from the main business of a bank. This separation is essential for bank rehabilitation, though secondary loan markets are illiquid, and plagued by problems in valuation and information sharing. Independent asset management companies are therefore needed, in particular as a tool in resolution. The legal framework for such institutions should ...

This briefing drafted under supervision of the Economic Governance Support Unit reviews the options for a separation of non-performing and other problematic assets from the main business of a bank. This separation is essential for bank rehabilitation, though secondary loan markets are illiquid, and plagued by problems in valuation and information sharing. Independent asset management companies are therefore needed, in particular as a tool in resolution. The legal framework for such institutions should now be prepared.

Parlamendiväline autor

Alexander Lehmann

Carving Out Legacy Assets: A Successful Tool for Bank Restructuring?

15-03-2017

This paper was drafted under supervision of the Economic Governance Support Unit. European banks have accumulated more than €1 trillion in non-performing loans (NPLs) on their balance sheets after the burst of the 2007-2009 great financial crisis. The NPLs pose a potential threat to bank stability in euro-area countries such as Cyprus, Greece, Italy, Portugal and Slovenia, where more than 15% of the loans are non-performing. This paper assesses the effectiveness of the various resolution tools to ...

This paper was drafted under supervision of the Economic Governance Support Unit. European banks have accumulated more than €1 trillion in non-performing loans (NPLs) on their balance sheets after the burst of the 2007-2009 great financial crisis. The NPLs pose a potential threat to bank stability in euro-area countries such as Cyprus, Greece, Italy, Portugal and Slovenia, where more than 15% of the loans are non-performing. This paper assesses the effectiveness of the various resolution tools to deal with legacy assets such as NPLs under the resolution framework. On the one hand, the on-balance sheet tools (no tools, sales of entire bank, and asset guarantees) and on the other hand, the tools that carve out the assets from the banks’ balances (selling part of the bank, bridge bank and asset separation) are assessed based on the experiences in the aftermath of the financial crisis. The figures for the 79 euro-area banks that received capital support between 2007 and 2016 show that the differences in bank viability as well as financial and economic stability are fairly similar across tools, except for the sale of the entire business and bridge banks. Taking also the costs (losses and recapitalisation) into account, asset management companies in particular, as well as bridge banks, guarantees and no specific resolution tools, seem under the current conditions to effectively deal with legacy assets such as NPLs.

Parlamendiväline autor

Willem Pieter de Groen

Carving Out Legacy Assets: A Successful Tool for Bank Restructuring?

15-03-2017

This paper was drafted under supervision of the Economic Governance Support Unit. Beginning with the proposal by Enria (2017), the paper discusses the scope for successful bank restructuring through a carveout of impaired assets and a transfer of these assets to a government-sponsored asset management company. The paper argues that the success of such an operation requires a use of public funds, either outright or through contingent commitments. Clawback provisions are problematic because they create ...

This paper was drafted under supervision of the Economic Governance Support Unit. Beginning with the proposal by Enria (2017), the paper discusses the scope for successful bank restructuring through a carveout of impaired assets and a transfer of these assets to a government-sponsored asset management company. The paper argues that the success of such an operation requires a use of public funds, either outright or through contingent commitments. Clawback provisions are problematic because they create contingent liabilities that merely shift risks from the assets side to the liabilities sides of banks’ balance sheets. The paper distinguishes between asset impairments coming from considerations of prospective returns and asset impairments coming from frictions in the markets in which these assets are traded. It also distinguishes between threats to bank solvency and threats to bank funding/liquidity. In each case, the success of bank restructuring from asset carveouts depends on the extent to which threats to the bank’s solvency is eliminated. If these threats concern bank funding and asset liquidations at depressed prices, public funds may eventually not be needed. If threats to bank solvency come from nonperforming loans, taxpayer support may be essential. The notion of “real economic value” as the price at which assets should be transferred is problematic and leaves ample room for hidden subsidies. The success of restructuring of the individual bank may itself come at a risk to financial stability as the preservation of existing capacities maintains competitive pressure and depresses bank profitability. Additional risks may come from the burden on the government’s fiscal stance.

Parlamendiväline autor

Martin Hellwig

Carving Out Legacy Assets: A Successful Tool for Bank Restructuring?

15-03-2017

This paper drafted under supervision of the Economic Governance Support Unit considers a number of issues related to the restructuring of troubled banks in the EU. First, we provide an overview of how legacy assets have been dealt in a number of countries (drawing in particular upon the experience in Japan, the USA, Sweden and Spain), which support the case for a centralized solution in the presence of a generalized banking crisis. Second, we shed light on the need to differentiate between systemic ...

This paper drafted under supervision of the Economic Governance Support Unit considers a number of issues related to the restructuring of troubled banks in the EU. First, we provide an overview of how legacy assets have been dealt in a number of countries (drawing in particular upon the experience in Japan, the USA, Sweden and Spain), which support the case for a centralized solution in the presence of a generalized banking crisis. Second, we shed light on the need to differentiate between systemic and non-systemic events by examining the relevant literature on the credit channel. Third, we elaborate the theoretical argument on the need for a systematic centralised approach at the EU level to deal with legacy assets in bank restructuring to maintain fair recovery rates. Finally, we provide a preliminary assessment of the business models, risk, response to regulation and performance of 38 state aided banks via recapitalisation measures and explicit restructuring requirements with an emphasis on APS-AMC arrangements using available data between 2005 and 2015. The indicators show that these state aided banks are returning progressively to soundness and struggling to regain performance levels of the pre-crisis period, which is a generalised problem of the European banking sector.

Parlamendiväline autor

Rym Ayadi, Giovanni Ferri and Rosa M. Lastra

Alternatives to Investor Compensation Schemes and their Impact

15-11-2012

This study investigates whether private insurance contracts can be a substitute to investment compensation schemes (ICS). Starting by describing the scope of events (fraud, administrative malpractice, operational error and bad advice) which are covered by ICS, the study continues to analyse whether existing insurance products offer cover for this. Then the authors analyse the economic advantages and disadvantages, costs and legal challenges of partially and/or fully substituting ICS with private ...

This study investigates whether private insurance contracts can be a substitute to investment compensation schemes (ICS). Starting by describing the scope of events (fraud, administrative malpractice, operational error and bad advice) which are covered by ICS, the study continues to analyse whether existing insurance products offer cover for this. Then the authors analyse the economic advantages and disadvantages, costs and legal challenges of partially and/or fully substituting ICS with private insurance. Finally, they investigate the consequences of taking out insurance for systemic risk and comment whether transparency towards investors is beneficial.

Parlamendiväline autor

Anne-Kathrin BARAN (Centrum für Europäische Politik), Jochen BIGUS (Freie Universität Berlin), Philipp ECKHARDT (Centrum für Europäische Politik) and Bert VAN ROOSEBEKE (Centrum für Europäische Politik)

Workshop on 'Financing energy savings and energy efficiency in Europe'

14-10-2011

The workshop set out to evaluate and assess the advantages, disadvantages and barriers related to the various financing instruments for energy savings and energy efficiency. It also looked at the financing needs and relevant instruments for achieving energy savings under energy obligation schemes.

The workshop set out to evaluate and assess the advantages, disadvantages and barriers related to the various financing instruments for energy savings and energy efficiency. It also looked at the financing needs and relevant instruments for achieving energy savings under energy obligation schemes.

Parlamendiväline autor

Johannes Feist and Johannes Feist (Kreditanstalt für Wiederaufbau - KfW, Germany) ; Terry Ward (Applica) ; Brian Motherway (Sustainable Energy Authority of Ireland -SEAI, Ireland) ; Didier Bosseboeuf (World Energy Council and French Agency for Environment and Energy Management - ADEME)

Amending Directive 97/9/EC on Investor Compensation Schemes (ICS): Safeguarding Investors' Interests by Ensuring Sound Financing of ICS

15-12-2010

This compilation of briefing papers deals with two specific issues in relation to the Commission Proposal to amend Directive 97/9/EC on Investor Compensation Schemes (ICS), more specifically on how to safeguard investors' interests by ensuring sound financing of ICS. The first two notes discuss the proposed borrowing mechanism (namely questions such as: Is the proposed compulsory borrowing mechanism an adequate solution which does not lead to moral hazard? Which alternatives to the mutual borrowing ...

This compilation of briefing papers deals with two specific issues in relation to the Commission Proposal to amend Directive 97/9/EC on Investor Compensation Schemes (ICS), more specifically on how to safeguard investors' interests by ensuring sound financing of ICS. The first two notes discuss the proposed borrowing mechanism (namely questions such as: Is the proposed compulsory borrowing mechanism an adequate solution which does not lead to moral hazard? Which alternatives to the mutual borrowing mechanism could be taken into account? Are there other sources for funding than the proposed borrowing mechanism with a view to avoid moral hazard?) and explore interim solutions in view of the proposed 10-year transition period to build up the final level of exante funding. In this regard, the notes cover approaches to protect investors within this 10-year period and possible alternatives, e.g. in terms of building up the target level and in terms of timing. The third and fourth note relate to funding principles and mechanisms. They evaluate in particular whether the proposed (ex-ante) target fund level of 0.5% is adequate in view of the products covered, the coverage level, and in view to the risk covered occurring in investment firms and UCITS. Furthermore, it is examined if the ex-ante funding as such is an adequate solution to finance the schemes.

Parlamendiväline autor

Marco LAMANDINI (University of Bologna) ; Kern ALEXANDER (University of Zurich and Centre for Financial Analysis and Policy University of Cambridge) ; Achim KASSOW (Member of the Board of Managing Directors, Commerzbank AG) and István FARKAS (economist, independent advisor, Budapest, Hungary)

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