Asset Management Companies (AMC)

4.7Asset Management Companies (AMC)

Underlying the different policy options available to manage the situation, there is a common understanding that economies with a significant real estate bubble need to recognize prospective high losses on developer and mortgage loans. In those countries with “market value toxic assets”, the impact is immediate and transparent, but in those cases with a high loan portfolio exposure (accounted at “book value”), the recognition of a substantial price decline requires more time and therefore in many cases the creation of special vehicles to manage it.

The creation of the so-called “Bad Banks” or “Asset Management Companies (AMC)” were first implemented on a limited basis in the 80s and 90s but its use increased significantly since the beginning of the financial crisis in 2007-08, particularly in Western Europe. The AMC approach was envisaged as a way of cleaning up balance sheets, allowing financial institutions to get rid of problematic assets and thereby continuing with their lending activities.

Although there have been many different schemes –depending on the size, the legal framework, the assets scope, or the capital and funding structure, and there are no two similar cases in the world, the initiatives undertaken can be summarized in two types.

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  Solutions in which the “unhealthy” financial institution is internally split into a “good” and a “bad” financial institution, setting up a new division/segment within a fully functional operational financial group;
  
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  Creation of a separate legal entity, normally with the support of the State, into which troubled financial institution/s transfers non-core assets (REO, performing or non- performing loans)³⁸.
  

Beyond those common factors, AMC structures differ significantly as a result of different combinations of the following aspects that must be analyzed and defined³⁹, e.g. number of contributing institutions, mandatory/voluntary transfer of assets, scope, volume and pricing of assets to be transferred, legal framework, capital and funding sources of the AMC, etc.

As a result accurately estimating the value of assets remains challenging, and in some cases (e.g. Ireland or Spain), a theoretical long-term economic value has been defined, instead of applying directly book value (very far from reality) or market value (inexistent). Finding the right valuation is important for maintaining market credibility and ensuring the financial stability of the new vehicle.

The authorities are encouraged to consider AMC as a last resort measures, as global experience shows that achieving fiscal efficiency and improvement in lenders’ practices is challenging. Furthermore, in the absence of a deep liquidity for the assets [or derivatives] in a given market the initial fairness and long term sustainability of a given AMC may be questionable.

In ECA context this is particularly true for real estate assets as such, e.g. REO homes, and for mortgage loans. In the absence of a functioning whole loan transfer legal and institutional framework – and the liquid market for these assets – AMC may be doubly hit with very expensive initial transfer of assets to its balance sheet and long term challenges in both working them out and ultimately selling them to the market.

An additional consideration should be given to long term incentives for the lenders to participate in the operations of the AMC – at least in the process of working out the assets. This mechanism may take the form of a delayed payment or similar types of “skin in the game” techniques which are presumed to limit the incentive of the lender to “offload and forget” the assets.

Ultimately, a private sector solution – which minimizes the exposure of taxpayers to the problems of the private banks – is encouraged to be considered by the ECA authorities [if AMC at all is being discussed in a given country]; spending fiscal resources to bail out private banks may not be a sustainable or defensible approach.