POLICY RESEARCH WORKING PAPER 2284 Asset management companies have been used to The Use of Asset address the overhang of bad Management Companies debt in a country's financial Management Companiessytmbepdin system - by expediting in the Resolution corporate restructuring or rapidly disposing of corporate of Banking Crises assets. A study of seven cases suggests that such companies tend to be ineffective at Cross-Country Experience corporate restructuring and are good at disposing of Daniela Klingebiel assets only when they're usecl to meet fairly narrow objectives in the presence oiz certain factors: an easily liquefiable asset (such as real estate), mostly professional management, political independence, adequate bankruptcy and foreclosure laws, skilled resources, appropriate funding, good information and managemenc systems, and transparent operations and processes. The World Bank Financial Sector Strategy and Policy Group February 2000 [OLICY RFSEARCH WORKING PAPER 2284 Summary findings Asset management companies have been used to address Asset management companies used to dispose of assets the overhang of bad debt in the financial system. There rapidly fared somewhat better. Two of four agencies (in are two main types of asset management company: those Spain and the United States) achieved their objectives, set up to expedite corporate restructuring and those suggesting that asset management companies can be used established for rapid disposal of assets. effectively for narrowly defined purposes of resolving A review of seven asset management companies reveals insolvent and inviable financial institutions and selling a mixed record. In two of three cases, asset management off their assets. Achieving these objectives required an companies for corporate restructuring did not achieve easily liquefiable asset - real estate - mostly their narrow goal of expediting baiik or corporate professional management, political independence, restructuring, suggesting that they are not good vehicles adequate bankruptcy and foreclosure laws, appropriate for expediting corporate restructuring. funding, skilled resources, good information and Only a Swedish asset management company management systems, and transparent operations and successfully managed its portfolio, acting sometimes as processes. lead agent in restructuring - and helped by the fact that The other two agencies (in Mexico and the the assets acquired had mostly to do with real estate, not Philippines) were doomed from the start, as governments manufacturing, which is harder to restructure, and transferred to them politically motivated loans or represented a small fraction of the banking system's fraudulent assets, which were difficult for a govern7nent assets, which made it easier for the company to remain agency susceptible to political pressure and lacking independent of political pressures and to sell assets back independence to resolve or sell off. to the private sector. This paper -a product of the Financial Sector Strategy and Policy Group --is part of a larger effort in the group to study the management of banking crises. Copies of the paper are available free from the World Bank, 1818 H Street, NW, Washinigton, DC 20433. Please contact Rose Vo, room MC9-624, telephone 202-473-3722, fax 202-522-2031, email address hvol Cworldbank.org. Policy Research Working Papers are also posted on the Web at www.worldbank.org/ research/workingpapers. The author may be contacted at dklingebiel@worldbank.org. February 2000. (52 pages) The Policy Research lWorking Paper Series dissemoinates the findings os work in progress to encourage the exchaege of ideas abort development issues. An objective of the series is to get the findings o71t quickly, even if tbe presentations are less than fully polished. The papers carry the nanies of the authors and should be cited accordingly. The finding<, initerpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bantk, its Executive Directors, or the cotintries they representt. Produced by the Policy Research Dissemination Center- The Use of Asset Management Companies in the Resolution of Banking Crises Cross-Country Experiences Daniela Klingebiel Joumana Cobein provided valuable input for the US case study, Marinela Dado for the Ghana, Mexican, Philippine and Spanish case studies and Gabriela M. Gonzalez for the Finnish and Swedish case studies. The author thanks Gerard Caprio, Stijn Claessens, Steph Haggard, James Hanson, Patrick Honohan, Jose de Luna Martinez, Richard Roulier and Esen Ulgenerk for comments. 1 I. Introduction In recent decades, many countries have experienced banking problems requiring a major and expensive overhaul of their banking system. By one count, 112 episodes of systemic banking crises occurred in 93 countries since the late 1970s (Caprio, Klingebiel 1999). Bank restructuring often has to be accompanied by corporate debt restructuring as most of the NPLs of a banking system in trouble are usually loans to non-financial enterprises which are no longer able to service their debt. Countries can adopt either flow or stock approaches to resolving banking distress and the overhang of bad debt in the financial system. As cross country evidence indicates, stock solutions tend to be necessary, where banking distress is systemic and often include the liquidation of unviable banks, disposal and management of impaired assets and the restructuring of viable banks. For the management and disposal of bad debt, governments have made extensive use of publicly owned asset management companies (AMCs) that either dispose of assets hived off from bank balance sheets or restructure corporate debt. AMCs have become very popular including in the recent East Asian financial crises (see Claessens, Djankov and Klingebiel, 1999). While establishing AMCs is now an often recommended resolution strategy to manage and dispose of impaired assets (for example Dziobeck, Pazarbasioglu 1997), little is known about the effectiveness of these centralized agencies. The paper below attempts to close this gap and has two objectives: (i) to analyze on a conceptual basis the advantages and disadvantages of AMCs in managing and disposing of impaired assets; and (ii) to gauge the effectiveness of such institutions using cross country experience. It will only focus on this aspect of systemic bank restructuring and will not discuss pros and cons of different bank recapitalization strategies including the use of AMCs as part of that strategy. Two main types of AMCs can be distinguished: AMCs set up to help and expedite corporate restructuring and AMCs established to dispose of assets acquired/transferred to the government during the crisis-rapid asset disposition vehicles. According to a survey of 26 banking crises (Caprio, Klingebiel 1997b), centralized AMC structures were set up in nine cases. Out of the nine, seven cases, where data was publicly available for a more thorough analysis, were selected. In three out of the seven cases (Finland, Ghana, Sweden), the government set up restructuring vehicles. In four cases (Mexico, the Philippines, Spain and the US) governments set up rapid asset disposition agencies. The results of the analysis of the seven cases can be summarized as follows: Two out of three corporate restructuring AMCs did not achieve their narrow goals of expediting corporate restructuring. These experiences suggest that AMCs are rarely good tools to accelerate corporate restructuring. Only the Swedish AMC successfully managed its portfolio, acting in some instances as lead agent in the restructuring process. It was helped by some special circumstances, however: the assets acquired were mostly real estate related, not manufacturing that are harder to restructure, and were a small fraction of the banking system which made it easier for the AMC to maintain its independence from political pressures and to sell assets back to the private sector. Rapid asset disposition vehicles fared somewhat better with two out of four agencies, namely Spain and the US, achieving their objectives. The successful experiences suggest that AMCs can be effectively used, but only for the purpose of asset disposition including resolving insolvent and unviable financial institutions. But even achieving these objectives required many ingredients: a type of asset that is easily liquifiable-real estate, 2 mostly professional management, political independence, a skilled resource base, appropriate funding, adequate bankruptcy and foreclosure laws, good inforrnation and management systems, and transparency in operations and processes. In the Philippines and Mexico, the success of the AMCs was doomed from the start as governments transferred a large amount of loans politically motivated loans and/or fraudulent assets to the AMCs which are difficult to be resolved or to be sold off by a government agency. Both of these agencies did not succeed in achieving their narrow objective of asset disposition, thus delaying the realignment of asset prices. The remainder of the paper is organized as follows. Section II examines alternative strategies for the handling of problem assets in banking crises used in stock solutions and compares the decentralized approach of asset management-non-performing assets are left with the individual bank to deal with-to the centralized approach-non-performing assets are transferred to a centrally managed asset management company-and describes the different types of asset management companies - rapid asset dLisposition vehicles and restructuring vehicles in greater details. Section III presents the analysis of seven country cases of asset management companies. Section V draws some conclusions. II. Alternative Strategies for Handling Problem Assets in Banking Crises -The Centralized versus the Decentralized Approach- While there is a growing literature on the do's and don'ts of banking crisis management literature,' empirical studies in this area remain sparse." Bank restructuring seeks to achieve many-often conflicting-goals: preventing bank runs, avoiding a credit crunch, improving the efficiency of the financial intermediation process and aiLtracting new equity into the banking industry to economize on claims on the public finances. As Dziobeck (1998) notes the style of responses has also changed over time. It is therefore not surprising that there is no unique or optimal blueprint on how to manage systemic banking distress. On a conceptual basis, countries can use either flow or stock approaches to resolving banking distress and the overhang of bad debt in the financial system. Whether a country should adopt a flow or a stock solution depends, among other things, on the degree of distress in the system and the extent of the official safety net. Flow solutions usually attempt to allow banks to strengthen their capital base over time through i ncreased banking system profits- recapitalization on a flow basis-and do not explicitly address the stock of bad debt in a system.3 Cross country evidence suggests that flow solutions are only successful when banking distress is limited, i. e. non-systemic, and the official safety net is either limited or the supervisory authority is willing to intervene in those institutions whose capital base is further deteriorating. For example, in the early 1990s, US money center banks enjoyed substantial forbearance and successfully recapitalized on a flow basis).4 Contrary to that, stock solutions ' For example, Sheng 1996, Rojas-Suarez and Weisbrod 1996, DziLobeck, Pazarbasioglu 1997, Goodhardt et all (1998); and Hawkins, Turner (1999) to name a just a few. 2 Caprio and Klingebiel 1997a, Dziobeck and Pazarbasioglu (1997). 3 Flow solutions also end up taxing either depositors and/or performing borrowers as banks would try to recapitalize from earnings, thus interest rate spreads would have to rise. Flow solutions are also inherently risky, as decapitalized banks have incentives to gamble for resurrection as was the case in the US savings and loan crisis. 4 Forbearance proved to be less successful in the US savings and loan crisis and Japan's banking problems that have continued for almost 10 years. Hoshi and Kashyap (1999). 3 are aimed at either restoring viable but insolvent or marginally solvent institutions to solvency or liquidating unviable institutions. Stock solutions tend to be necessary in cases where banking distress is systemic. The proper management and disposition of impaired assets is one of the most critical and complex tasks of successful and speedy bank restructuring. Successful asset management policies can facilitate bank restructuring by accelerating the resolution of non-performing assets and can promote corporate restructuring by providing the right incentives for voluntary debt restructuring. There is an ongoing debate over the best model for asset management and recovery: should debt restructuring and workout be done by the banks themselves-the "decentralized model"-or should bad debt be transferred to a centralized publicly owned asset management company (Garcia 1997, Claessens 1998, IMF 1999) charged with resolving the overhang of impaired assets. Empirical studies and/or cross country analysis on the usefulness and success of the decentralized versus the centralized approach in asset management have yet to be performed. This paper is intended as a first step in this direction as it will analyze the actual performance of AMCs given its stated goals, thus providing insight in whether or not AMCs may be a useful tool in the management of distressed assets. A companion paper looks at the experience of banking crisis where the responsibility for the workout of bad debt was mainly left with the banks (Dado, Klingebiel 2000). Decentralized work-out of non-performing loans. In general, banks should be better placed to resolve NPLs than centralized AMCs as they have the loan files and some institutional knowledge of the borrower. Leaving the problem assets on banks' balance sheets may also provide better incentives for banks to maximize the recovery value of bad debt and avoid future losses by improving loan approval and monitoring procedures. Leaving NPLs with banks also has the advantage that these banks can provide new loans in the context of debt restructuring. Successful decentralized debt workouts require, however, limited or no ownership links between banks and corporates, otherwise the same party would be both debtor and creditor, adequately capitalized banks and proper incentives for banks and borrowers. For example, the very slow speed of restructuring in Japan is in part due to the extensive ownership links among banks, other financial intermediaries, and corporations (IMF, 1999). Moreover, successful debt workout by banks requires that financial institutions have sufficient skills and resources to deal with their problem loans. A decentralized bad debt work-out can be accomplished by establishing an internal work- out unit, or "bad banks"-separately capitalized-which are subsidiaries of banks. Sole objectives of these units/or bad banks is to focus attention on the work-out of the assets in a separate unit of the financial institution and maximize the recovery rate through active restructuring reducing drains on managerial capacity and improving overall incentives. A clean break can also help rebuild confidence in failed banks. But there are also considerable risks associated with private AMCs that are spun off from individual banks. They can be used for "window-dressing" if assets are transferred at book value or above market value, i. e. not all losses are not taken at the bank level but some are 4 effectively transferred to another entity.5 Even if regulations are in place that require financial institutions to transfer their assets at market value, the supervisory authority needs to have the powers and the incentives to enforce such rules. Permitting banks to establish separately capitalized workout units or bad banks, therefore needs to be supported by a well-functioning regulatory framework, appropriate disclosure and accounting regulations with strong monitoring and enforcement by the supervisory agency and the market and third party reviews. The centralized approach. The centralized asset recovery approach permits a consolidation of skills and resources-centralization of work-out skills and information technology-in debt restructuring within one agency and may thus be more efficient in recovering maximum possible value. A centralization can also help with the securitization of assets as it has a larger pool of assets. It centralizes the ownership of collateral, thus providing potentially more leverage over debtors and more effective management. Moreover, distressed loans are removed clearly, quickly and completely from banks allowing them in turn to focus on their day-to-day activities.6 Centralized agencies may have also have the advantage of breaking links between banks and corporates and may thus be better able to collect on connected loans. Other arguments that are sometimes advanced in favor of a single entity include: improved prospects for orderly sectoral restructuring in the real economy,7 application of uniform workout practices, and easier government monitoring and supervision of workout practices. Finally, a centralized agency can be given special legal powers to expedite loan recovery and bank restructuring.8 A centralized workout unit may, however, also face problems related to its size and ownership structure. If the agency carries a large portion of banking system assets, it may be difficult for the government to insulate such an entity from political pressure especially in cases where the government is also charged with the restructuring of the assets and where a large portion of banking system assets has been transferred. Moreover, a transfer of loans can break the links between banks and corporations, links that may have positive value given banks' privileged access to corporate information.9 If AMC assets are not actively managed, the existence of a public AMC could lead to a general wleakening of credit discipline in the financial system and lead to a further deterioration of asset values. 5 For example, if the bank is not subject to consolidated supervision, it can transfer the problem assets at book value and "hide" the losses as the AMC's balance sheet is not consolidated with that of the bank. Or even if the accounts are consolidated, they may be obscured. For example, the bank may take a minority position (to avoid consolidation at the bank level) and may ask connected companies to put up the rest of the equity. 6 Nevertheless, it is also argued that a reasonable amount of small-sized problem loans should remain within the bank's ordinary organization, even if the bulk of bad assets are transferred to a separate AMC. Apart from the argument of maintaining a level playing field among the remaining banks, leaving some non-performing assets in the banks will preserve their capability to work out loans that do not require special expertise. Also the transaction cost incurred by transferring small assets may outweigh any potential gains. See for more detail: Ingves/Lind (1996). ' The idea here is to use the AMC as a tool for industrial policy. This imay, however, be tricky for two reasons: (i) it is not necessarily obvious that the government has better information than the private sector about overcapacity and future growth areas; and (ii) involving government agencies provides scope for political interference. a Special powers, however, may not compensate for a weak judicial system and thus may prove less useful if they have to be enforced by the judicial system. 9 However, the value of such information depends on the viability of the corporates they have been lending to. 5 Countries have employed variants of the above techniques to deal with asset and debt recovery. For either solution-centralized or decentralized management of assets-, a legal framework that facilitates the workout will be a key element in influencing the final costs of bank restructuring (Waxman 1998). A good bargaining position for the holder of the asset and power to act are essential factors for the management of non-perforning loans. Well functioning legal procedures and good access to courts are therefore crucial. Equally important are laws that facilitate actions by the banks or AMCs to exercise claims on assets and to recover the proceeds of sales of such assets if debt is not serviced. Moreover, for asset management companies to maximize returns, it is of particular importance that they have access to a clean title and do not require the borrower's consent to the sale of the assets. Box 1: Advantages and disadvantages of a centralized public AMC Advantages * Economies of scale-i. e. consolidation of scarce work out skills and resources within one agency. * Can help with the securitization of assets as it has a larger pool of assets. * Centralizes ownership of collateral, thus providing (potentially) more leverage over debtors and more effective management. * Breaks links between banks and corporates and thus could potentially improve the collectibility of loans. * Allows banks to focus on core business. * Improves prospects for orderly sectoral restructuring of economy. * Allows the application of uniform workout practices. * Can be given special powers to expedite loan recovery and bank restructuring. Disadvantages * Banks have informational advantages over AMCs as they have collected information on their borrowers. * Leaving loans in banks may provide better incentives for recovery-and for avoiding future losses by improving loan approval and monitoring procedures. * Banks can provide additional financing which may be necessary in the restructuring process. * If assets transferred to the AMCs are not actively managed, the existence of an AMC may lead to a general deterioration of payment discipline and further deterioration of asset values. * It may be difficult to insulate a public agency against political pressure especially if it carries large portion of banking system assets. The Different Types of Asset Management Companies There are mainly two types of centralized asset management companies: (i) asset disposition vehicles including liquidation vehicles and (ii) longer term restructuring vehicles. Whereas the typical objective of asset disposition and liquidation agencies is to sell the assets promptly, through bulk sales or securitizations-for asset disposition and liquidation agencies)-and via purchase & assumption transactions-for liquidation agencies-restructuring agencies tend to have different sets of objectives. Asset disposition agencies. Centralized asset sale agencies are set up to dispose of particular classes of assets that by nature tend to be more easily liquifiable-real estate assets, commercial real estate loans, secured loans that can be either easily sold off or securitized in case of a deep 6 capital market-and that were transferred to the AMC during a bank restructuring and/or recapitalization exercise. To maintain value, assets need to be managed. Even good loans tend to lose value when they are taken from the originating bank unless the AMC monitors them actively.10 Otherwise even good borrowers may fail to service their loans. The management of the assets can either be performed by the AMC itself, or can be outsourced to the private sector or by the originating bank if it is still in operation. In that case, a loss sharing arrangement with the AMC could provide incentives for the bank to monitor/manage the assets properly.11 Liquidation agencies are set up to resolve failed financial institutions including selling of their assets through P&As, insured deposit transfers, as well as deposit payoff and sale of the performing or non-performing assets that cannot be sold in P&A transactions. Restructuring agencies. Restructuring agencies are usually set up on a longer term basis and are aimed at restructuring and liquidating NPLs of non-viable borrowers prior to their sale. Typically, as a first step in the restructuring process, the assets transferred to the AMC are grouped either into viable claims that need to be restructured or into non-viable claims for which borrowers will be forced into bankruptcy.12 The overall objective of the AMC, if it is pursuing a commercial objective, usually is to make the assets financially viable and thus attractive for a buyer. The restructuring of viable assets can include-in case of an industrial company-selling off non-core assets and improving the overall efficiency of operations by reorganizing and reducing staff, cutting other costs, restructuring product lines, etc. In case of commercial real estate and residential homes, measures to increase the attractiveness of the properties can include renovation of the properties to adapt them to current market demand or reducing the vacancy ratio, which is a crucial factor in improving the cash-flow. As restructuring often requires new lending, the AMC needs to have the capacity to lend.'3 After the restructuring process is completed, assets are sold to investors in various ways. Ownership Structure. Large privately held centralized AMCs are rare. If a substantial amount of bad loans and assets were transferred to an AMC, i: is usually difficult to find private investors willing to assume the ownership of such an AMC without requiring far reaching state guarantees covering the future value of the asset portfolio. In that case, the government may be in a more favorable position if it owns the AMC rather than providing such guarantees since it might then benefit from any upward price movement of AMC assets. Moreover, under such a scenario, it may be difficult to structure the guarantee in such a way that it preserves the private owners' incentives to sell the assets at best prices. Public ownership could also be warranted if the value of impaired assets could be destroyed through "fire sale" liquidations. In that instance, the gradual sale by a specialized public agency may be better able to preserve the asset value. The timing of assets sales. The warehousing of assets in the hopes of obtaining higher prices later may not prevent prices from tumbling since the future supply of assets will be discounted in current prices (Shleifer and Vishny 1992; Lang, Poulsen and Stulz 1995). This is especially '0 To fulfill this role, the AMC need to set up internal information and operations systems and procedures and need to track assets and catalogue them. " In the Mexican case, the management of the assets was left with the originating banks. Despite loss-sharing agreements aimed at incentivizing the originating bank to continue to manage the assets properly, assets transferred to the AMCs were managed inadequately resulting in a further deteriDration of asset values. This suggests that it may not be an easy undertaking to develop incentive compatible contracts to prevent this from happening. 12 To increase transparency and depoliticize the process, these assessments should be done by third parties. 13 For more detail see: Ingves/Lind 1996. 7 the case for real estate assets, where fire sale losses need not imply an economic loss of value. At the same time, selling assets rapidly establishes floor prices that will promote a speedier recovery from the economic crisis. This may especially be so for public AMCs which typically have limited market insights. Evaluating the success of centralized AMCs. The success of centralized AMCs can be assessed on two dimensions: (i) Did they achieve their narrow objectives for which they were set up; and (ii) at a broader level, did the banking system return to solvency, did banking problems not reappear, and did credit extension resume as banks are presumably cleaned up and the problem of recuperating bad loans is decoupled from the business of making fresh loans.'4 Narrow objectives of AMCs. The success of rapid asset disposition and liquidation agencies will be measured by the speed of asset disposition. Here, an AMC is judged to be successful if assets, including banks, are disposed of rapidly that is within a five year timeframe. In the case of restructuring agencies it is more difficult to gauge whether they have indeed achieved their narrow objectives of accelerating corporate restructuring-because of the dearth of data and lack of the counterfactual. Thus, they will be considered successful if they sold off 50 percent of their assets within a five year time frame, indicating that the existence of a public AMC did not delay corporate restructuring. Broader objectives. To assess whether AMCs accomplished their broader objectives of restoring the banking system back to health, two criteria are used: (i) did the financial system/or bank experience repeated financial distress; and (ii) did real credit to the private sector resume and was aggregate credit growth positive in real terms? II. Cross Country Experience Sample Selection and Information Sources. While setting up centralized asset management companies has become a popular component of banking distress resolution strategies in the recent East Asian financial crises-Indonesia, Malaysia and Korea all set up centralized AMC structures-they were a less frequently used tool in the past. According to a survey of 26 banking crises15, centralized AMC structures were only set up in nine cases. AMCs proved to be particularly popular in Africa as four out of the nine AMCs were launched in Africa.,6 Out of these nine, seven cases, where sufficient data was publicly available, were selected for more detailed analysis. In four out of the seven cases (Mexico 1994; Philippines 1981-86, Spain 1977-85; US 1984-91); the governments set up rapid asset disposition vehicles, and in three cases (Finland 1991-94; Ghana 1982-89; Sweden 1991-94) restructuring agencies were established. As data sources, published reports, Annual Reports of AMCs if available or World Bank reports, or interviews with experts familiar with the individual cases were employed. 14 Some facilities also pursued the explicit objective to minimize fiscal costs. However, as we do not have information as to the counterfactual, we cannot evaluate whether AMCs have achieved that objective. 15 Caprio/Klingebiel 1996. 16 Benin, Cote d' Ivoire, Ghana and Senegal all set up centralized AMCs as part of their bank restructuring mechanisms. The other cases were Finland, Philippines, Spain, the US, and Uruguay. 8 Structure of Analysis. The analysis is structured as follows. In a first step, objectives and the main characteristics of the AMCs are briefly laid out including the amount of assets transferred relative to banking system assets, the sectoral breakdown of assets, criteria authorities used for the transfer of assets (if any) and the transfer price. Then, the attempt is made to gauge the success of those entities and analyze key factors for the success andlor impediments to the success of the AMC structure. Except for the US, all banking systems in the sample suffered from systemic banking system crisis, i. e. the aggregate banking system's capital had been exhausted (see Annex for more details on crises). In all country cases, the financial sector restructuring mechanisms adopted by authorities included the setting up of a centralized AMC structure. Figure 1 Assets transferred to A'MCs 24.00% - 22.00% 20.00% - -- - 18.00% 16.00% 14.00%-- _ _ _ - - w- 12 00% . - 10.00% 8.00% - --- - - l 6.00% 4.00% . - - - - _______t 0.00% Finland Spain Sweden USA Ghana Mexico Philippines * Assets transferred/Total financial system assets * Assets transferred/GDP Figure 1 provides an overview of the share of banking system assets transferred to AMCs in the seven country case studies. While the comparability of the data across countries may be limited due to differences in accounting standards, the figure nevertheless illustrates that the share of financial system assets managed by the respective AMCs as a result of the asset transfers varied widely among the countries. Both as a share of assets to total system assets but also as a percentage of GDP, the Philippine AMC had to deal with the largest share of NPLs as assets transferred amounted to almost 22 percent of financial system assets and 18 percent of GDP. At the other end of the spectrum, Spain's AMCs had to deal with only 1.0 percent of financial system assets which was equivalent to 1.3 percent of GDIP. With the exception of the US case, all assets transferred to the AMCs had been previously classified as non-performing. 9 Figure 2 provides preliminary information on the scope of the financial sector crisis in the seven countries by providing information on the peak level of non-performing loans in the financial system. Since the level of non-performing loans is a reflection of the performance of the real sector, this number can also be used as a rough proxy for the extent of corporate distress. Spain and the US were the only countries in the sample, where the extent of non- performing loans in the system remained limited, i. e. below ten percent as a share of gross loans. In the Philippines and Finland, official NPLs reached substantial proportion accounting for over or close to 20 percent of financial system assets.'7 In Ghana, more than half of banking system loans were non-performing. In the Mexican case, it should be noted that official numbers recorded the level of NPLs at around 11 percent of banking system loans. However, non-performing assets transferred to Fobaproa amounted to 23 percent of financial system loans or 17 percent of financial system assets at end 1996. Figure 2 Magnitude of Crisis and Resolution Costs (in percent of GDP) 1 Finland . ..--. Ghana Mexico Philippines Spain Sw eden USA I, 0 25 50 75 100 125 150 l Resoluton cost * Totalclairrs 0 Nonefonrningloams Source: Caprio and Klingebiel (1999) and IMF, International Financial Statistics. 1. Cross Country Experience with Rapid Asset Disposition Agencies'8 Table 1 provides an overview of the main characteristics of the four country examples with rapid asset disposition vehicles. Two of the agencies-the Mexican and the Spanish AMCs-were housed in an existing public agency, the Deposit Guarantee Agency. Contrary to this, the Philippine and the US agencies were set up as stand alone agencies with a limited life 17 As the accounting conventions differ among the countries in the sample, these figures should be treated with caution, Among the countries, Spain, the US, Finland and Sweden have stricter classification regulation compared to Ghana, Mexico and the Philippines. is It should be noted that the analysis of the Mexican rapid asset disposition agency Fobaproa reflects available information until the end of 1998. 10 span. All four agencies pursued similar objectives. The rmain goal of Fobaproa (Mexico), the Asset Privatization Trust (APT), the Spanish Deposit Guarantee Fund and the US RTC was to dispose of the assets that were transferred to them as fast as possible while maximizing the recovery value of the assets. APT was solely focusing on the disposition of non-performing assets that had been transferred in a one off transaction. In contrast, Fobaproa was also involved in the clean up and recapitalization of the banks that were still in operation, as assets were purchased by Fobaproa at above fair market value, and continued to acquire assets through several rounds of loan purchases in exchange for government securities. By end 1997, the assets to be disposed of by Fobaproa amounted to 17 percent of banking system assets compared to 22 percent on ATP's books.'9 The Spanish Guarantee Fund and the RTC operated as centralized liquidiation agencies and as such they were responsible for resolving financial institutions including their liabilities that had been previously taken over or were intervened in-through different mechanisms. Moreover, the amount of bad debt that was effectively managed and sold by these entities was small relative to financial system assets; 1 percent in the case of the Spanish agency and 8.0 percent in the US case. Evaluating Success. Fobaproa and ATP did not achieve their narrow objective of rapid asset disposition. By early 1999, four years after it had been established, Fobaproa only sold 0.5 percent of its assets and APT still has 50 percent of its original assets on its book twelve years after it started operations. In both cases, rapid asset sales were not hampered by negative or sluggish GDP growth (Table 2) as GDP growth was positive. Rather, the disposition efforts of these agencies were hampered by a variety of reasons (see Table 1) most important of which was the type of assets transferred (politically motivated and/or fraudulent loans). As government agencies with limited independence and susceptible to political pressure, both agencies were not equipped to resolving assets whose initial extension was based more on political connections than due diligence on the merits of the projects to be financed. Asset disposition was also hampered by a weak legal framework. For example, in Mexico, the government, at the time of asset transfer, had restricted financial institutions, including Fobaproa, from foreclosing on assets. Moreover, the rapid sale of assets was further hindered by the fact that the agency was insufficiently funded. As assets were transferred from banks at above market values, the disposition of these assets would have revealed the true losses of the banking system. Finally, the considerable amount of irnpaired assets under FOBAPROA's ownership impeded effective corporate restructuring in at least three ways: (i) it depressed market value of bank assets generally; (ii) continued government control of such a large share of total indebtness encouraged continued politicization of asset restructuring process; and (iii) repeated non-performing asset sales limited banks' incentives to engage in corporate restructuring. Contrary to that, the Spanish and the US agencies met their narrow objectives as both of them disposed of 50 percent of assets within the five year time period. The Spanish Guarantee Fund and the RTC, after some initial problems, were successful in developing fair, credible and transparent processes and mechanisms for the resolution and sale of financial institutions and managed to sell those institutions in a relatively short period of time minimizing disruptions for depositors and borrowers (Sheng 1996; GAO 1997). One key factor for the success of the Spanish Deposit Guarantee Fund was that the banks thal: were to be resolved were relatively small, which may have made it politically easier to deal with them. Moreover, the largest '9 Further details of the respective AMCs can be found in the Annex. 11 commercial banks in the system were sound enough to assist substantially in the resolution of the small banks. The RTC's success was helped by the fact that most of the assets to be disposed of were real estate loans/or assets or mortgage loans that could relatively easily be bundled and securitized or sold via bulk sales. Moreover, a deep and sophisticated capital market and a recovery in the real estate market also proved advantageous for the RTC as did an effective organizational and governance structure and skilled personnel. Despite succeeding in selling the 26 banks, the Spanish Guarantee fund proved to be less successful in disposing of the assets that had been carved out prior to the sale of the institutions, and part of the assets remain with the Fund even today. Despite an overall benign macro-environment and rising real estate prices, asset disposition was hampered by an inadequate legal framework and administrative obstacles (Table 2). For examples, the fund did not have the legal title or they were not registered for some of the real estate assets. Both Fobaproa and APT were also not successful in achieving their broader objectives, i. e. helping to build a more robust banking system as the Mexican banking system remains weak and one of the two banks that were cleaned up in the Philippine case appears to be in financial distress again. In addition, Fobaproa's repeated loan purchases at Mexican banks coupled with debt relief for borrowers, led to a general deterioration of the payment discipline and asset prices. Moreover, loan growth did not recover and remained strongly negative in Mexico. In contrast, banking sector solvency problems did neither reoccur in Spain nor in the US. Table 2 GDP and Real Credit Growth GDP growth (in percent) Real credit growth (in percent) Year of AMC One year Year of One year Two years One year Year of One year Two years establishment prior set up after after prior set up after after Finland 1993 -3.55 -1.18 4.55 5.06 -8.95 -10.59 -10.63 -3.82 Ghana 1990 5.09 3.32 5.31 3.89 100.44 -16.73 -20.55 41.76 Mexico 1995 4.42 -6.17 5.18 6.71 27.93 -30.70 -36.70 19.56 Philippines 1987 3.42 4.31 6.75 6.21 -21.12 17.04 5.26 11.41 Spain * 1980 0.04 1.30 -0.18 1.57 -0.60 2.20 2.00 2.79 Sweden 1992 -1.66 -1.42 -2.22 3.34 -9.21 -2.38 -23.06 -6.23 USA 1989 3.82 3.36 1.23 -0.93 5.63 5.35 0.23 -2.10 Source: IMF, International Financial Statistics. * For Spain: Year when the Deposit Guarantee Fund was granted legal powers for bank restructuring. 12 Table 1 Rapid Asset Disposition Agencies Rapid Asset Disposition Objectives of Rapid Asset Asset Transfer Outcome Key Factors .......... . _ . Disposition Agency -_-------- Mexico: * Clean up and * Amounts of Assets Transferred: * Transfer of loans did not succeed in Favorable Factors: FOBAPROA restructure banks. P142 billion (P119 billion net of restoring the banking system to solvency as * Strong economic recovery. * Set up in 1995; * Sell off or recover reserves for loan losses) equivalent capital deficiency was underestimated and continues to assets as quickly as to 17% of banking system assets. institutions remained weak even after Unfavorable Factors: operate. No pre- possible, through * Sectoral Breakdown of Assets: repeated rounds of loan repurchases at * Type of asset transferred, i. e. politically connected loans established auction, securitization, NPLs transferred included above market price. Moreover, operational assets that are difficult to handle for a government agency duration limit, or other market consumer, mortgage and corporate restructuring remained limited and bank susceptible to political pressure. * Public ownership. mechanisms. loans. management was left unchanged. * Lack of independence and weak governance as FOBAPROA * Centralized entity. (Management and * Criteria for Asset Transfer: Non- * As weaknesses in the banking sector was not separately managed but was under central bank * FOBAPROA set administration of transparent and repeated process remained, loan growth did not recover and management. Moreover, policy decisions were made by up as bank assets until then sale led to perceptions that some of the remained strongly negative. technical committee comprising the minister of finance, the restructuring was left with the banks received more favorable * By end 1998, FOBAPROA had sold only central bank govemor and the president of the financial agency. banks.) treatment than others. 0.5% of transferred assets. The huge supervisory body. * Asset Price: Transfer at book value overhang of impaired assets under * Substantial deficiencies in bankruptcy and foreclosure code; as assets were not valued prior to FOBAPROA's ownership impeded moreover, at the time that assets were transferred to transfer. effective restructuring in at least three ways: FOBAPROA, the govemment restricted financial (i) it depressed market value of bank assets institutions, including FOBAPROA, from foreclosing on generally; (ii) continued govemment control assets. of such large share of total indebtness * Insufficient funding of FOBAPROA. Sale of assets would encouraged continued politicization of asset have revealed the size of banking system losses. restructuring process; and (iii) repeated non- performing asset sales limited banks' incentives to engage in corporate restructuring. Philippines: * Orderly and fast * Amounts of Assets Transferred: * ATP did not reach its objective of "orderly Favorable Factors: Asset Privatization Trust transfer of non- Assets of about P108 billion and fast transfer" of assets to private sector * Strong economic recovery. (APT) performing assets to equivalent to 21.7 percent of as 40 to 50 percent of assets remain in * Set up in 1987, the private sector. banking system assets. APT's portfolio to date, including those of Unfavorable Factors: intended to 'be * Administration of the * Sectoral Breakdown of assets: the largest account, i.e., Nationai * t ype of asset transferred, i. e. politically connected loans closed in 1991. assets pending Everything from mining ventures, Construction Corporation, despite and/or fraudulent assets that are difficult to handle for a Still in operation. disposal. ships, textile plants and food conducive macro-economic environment. government agency susceptible to political pressure. * Public ownership. * In 1991, APT was also processing to luxury hotel resorts; * One of the recapitalized banks again faced * Rapid asset disposition was severely hampered by legal * Set up as charged with 70 percent of value was held in 15 solvency problems in the late 1990s. problems despite the fact that APT had temporary extra- centralized stand divestiture of very percent of assets; 75 percent of Nevertheless, credit growth rebounded judicial powers alone entity. large govemment assets constituted financial claims relatively strongly. * In addition, weak governance and insufficient funding. APT corporations. for which foreclosure procedures was neither privately managed nor an independent agency had not been completed. and budgetary pressures, i. e. avoidance to reveal losses, * Criteria for Asset Transfer: Size reduced APT's commitment towards rapid sale. and nature of accounts (i. e. non- * While APT had to submit quarterly reports on performance performing); potential for sale; and and financial status to the President and Congress, it did not any special expertise required for disclose any information on its activities and financial disposition of the assets. situation to the public and the process of asset sales remained * Transfer Price: Book value. non-transparent. 1 3 Rapid Asset Disposition Objectives of Rapid Asset Asset Transfer Outcome Key Factors Disposition Agency Spain: * Restructure banks for * Amounts of Assets Transferred: * Successful in selling intervened banks in Favorable Factors: Deposit Guarantee Fund prompt resale by Fund took over 26 banks with relatively short period of time upon . Fund operated as independent public agency under * Set up in 1977 and carving out bad assets assets amounting to I percent of acquisition. Banks were sold offon average private law with appropriate funding and had still in existence. that new investors financial system assets. These within one year, indicating that Deposit appropriate powers (could change management Was given legal were unwilling to take banks were restructured and then Guarantee Fund managed to accelerate the immediately, purchase assets, offer guarantees or capacity in 1980 to on. sold off to new investors. In some bank restructuring process. counter-guarantees on behalf of restructured banks, assume bank * Prompt sale of carved instances, large amount of assets * Moreover, banks resumed lending in 1980, grant long-term loans at subsidized rates or permit ownership to out assets with the aim were taken off bank balance sheet and credit to the private sector by banks temporary regulatory forbearance) for resolving initiate bank of maximum recovery and remained for rapid asset grew in real terms. institutions. restructuring. value. disposition in Guarantee Fund. * However, the Fund was much less * Banks to be resolved were small banks which made it Had no pre- Sectoral Breakdown of Assets: successful in achieving its aim of "rapid "politically easier" to resolve and the Fund was not established Real estate: 8.2 percent; other disposal of bad assets" that had been carved involved in resolution of political sensitive RUMASA duration limit. assets: 72.5 percent; out from banks' balance sheets. group. * Public ownership. shareholdings: 19.4 percent. . Fund was not involved in resolution of20 . The largest commercial banks in the system were sound * No stand alone * Criteria for Asset Transfer: Assets small and medium size banks of the Rumasa enough to assist substantially in resolving the small entity but part of that acquirers of banks were groups. Due to the scope of the problems of' banks albeit under considerable state pressure. Also, entity set up to unwilling to take on. the Rumasa group, the govemment decided competition in the home market from foreign banks resolve failed to nationalize the banks and the 200 provided incentive for Spain's private banks to acquire banks. industrial firms belonging to the group. The recapitalized banks sometimes even assuming losses. government adopted a two pronged strategy: * In tenns of disposition of non-performing assets, (i) take over control of companies and (ii) amount of those assets small (I percent of banking resale of the companies as soon as possible. system assets). * Overall, benign macro-environment. Unfavorable Factors: * The framework for foreclosures and seizures of collateral was deficient and impeded rapid sale of assets. * Moreover Deposit Guarantee Fund encountered problems with transfer of titles. * Lackluster demand for real estate assets. 14 Rapid Asset Disposition Objectives of Rapid Asset Asset Transfer Outcome Key Factors Disposition Agency USA: * Social as well as * Amounts of Assets Transferred: . Yes. RTC successful in resolving 747 Favorable Factors: Resolution Trust commercial: RTC was RTC resolved 747 thrifts with total thrifts and disposing of assets that were . Amount of assets transferred were relatively small (8.5 Corporation to maximize the net assets of US$ 465 billion. These carved out prior to bank sale. percent of financial system assets) and a large part of Set up in 1989, value proceeds from assets accounted for roughly 23.2 * Overall, RTC recovered 87 cents to the those assets were performing. Moreover, it should also RTC was to S&L crisis resolution, percent of S&L's assets or 8 dollar. be noted that S&L problem affected only a fraction of operate until but also had a broader percent of total bank and thrift the US financial system leaving sound institutions in the 1996. It ended mandate of minimizing assets in 1989. Of these, RTC sold market as potential buyer of the assets. operations in the impact on local US$ 153 billion through asset * The type of assets - as mostly performing real estate 1995. real estate and disposition, not connected to the related assets and consumer loan assets were transferred * Public ownership. financial markets, and sale of the financial institution. - could be sold offthrough wholesale disposition * No stand alone of maximizing * Sectoral Breakdown of Assets: mechanisms (bulk sales, securitization and auctions). entity but part of available and RTC acquired performing and . Deep and sophisticated capital markets. entity set up to affordable housing for non-performing assets; sectoral * Adequate govemance structures; professional resolve failed low to moderate breakdown of assets transferred: management and extensive use of private sector banks. income individuals. 42% mortgage loans; 7% real contractors for asset disposition. RTC relied on a estate; 8% other loans; 35% cash detailed set of directives and guidelines to its staff and & securities; 8% other assets. contractors that covered a wide range of operations, * Criteria for Asset Transfer: including asset management and disposition, contract Insolvency of the financial policies, bidding procedures and marketing. While this institution as determined by the reduced RTC's flexibility in handling individual cases, Central Bank. they minimized the possibility of fraud and made policy and cost evaluation more transparent and expedited resolution process. * Effective organizational structure including information management systems that can handle large amount of information and management of assets which allowed RTC to collect 31% of the total assets transferred and reduced by one third the amount of assets needed to be sold. Unfavorable Factors: * Sporadic funding of RTC (several pieces of legislation were required to approve funding) hampered speedy resolution of failed S&Ls and increased resolution costs. * Rapid asset disposition was hampered by inconsistent objectives of agency. In addition to cost minimization and expeditious disposition objective, the RTC was also supposed to structure and time its asset sales to minimize any impact on local real estate and financial markes. 15 2. Cross Country Experience with Restructuring Agencies Arsenal in Finland, NPart in Ghana, and Securum in Sweden were restructuring agencies for non-performing assets of banks that were either still in operation and recapitalized through the purchase of loan program at above fair market value-Ghana- or of banks that needed to be cleaned up prior to their sale to new investors-Finland and Sweden-(see Table 3). The narrow objective of all three entities was to manage and liquidate non-performing assets and accelerate corporate restructuring Evaluating Success. Securum, the Swedish asset management agency was successful in achieving its narrow objective of restructuring and/or selling off the assets in a relatively brief period of time and may have expedited restructuring in the broad real estate sector by acting in some cases as a lead agent enhancing creditor coordination (Bergren 1998). It closed its doors in 1997, five years after it had been established having sold off 98 percent of its assets. The following factors contributed to the success of Securum. Firstly, the government transferred mostly commercial real estate assets which may be easier to restructure as they may involve politically less sensitive issues-layoff of factory workers. Secondly, the assets that were transferred to Securum were mostly large and complicated assets for which it could be argued that Securum may have had a comparative advantage of resolving them. Thirdly, the government only transferred a limited amount of total banking system assets. Securum total assets amounted to 8 percent of total banking system assets. In addition, Securum had professional management, enjoyed political independence and was provided with appropriate funding. Finally, the economy and the real estate market recovered over that period (Table 2). Arsenal had disposed of more than 50 percent of assets after five years in operation, and thus did not appear to have delayed corporate restructuring. Yet, it is difficult to gauge whether the agency was an important agent in corporate restructuring and indeed accelerated the process. Factors that worked in Arsenal's favor were the following. Firstly, Arsenal only had to resolve a relatively small amount of banking system assets as assets transferred arnounted to 5.2% of banking system assets. Secondly, a large amount of the assets transferred were loans to real estate or loans secured by real estate. Thirdly, Arsenal was provided with appropriate funding, had professional management and a skilled human resource base. And finally asset resolution and disposition may have been helped by a strong economic recovery as the economy expanded at 4 and 5.1 percent in 1994 and 95. On the negative side, because Arsenal had received NPLs regardless of type and size of asset, it may have been more difficult for the agency to use wholesale divestiture techniques and also required it to build up expertise in different areas. Contrary to Securum and Arsenal, N-PART did not achieve its narrow objective of performing a substantial role in the restructuring of the corporate sector and expediting the restructuring process. In the end, the agency engaged mostly in cosmetic financial restructuring extending maturity, and lowering interest rates and functioned as a collection agency. Factors that contributed to that outcome were the fact that the agency lacked political independence and professional management at the highest level of the institution. In addition, N-Part not only had to resolve a large share of outstanding banking system assets but also more than 50 percent of assets transferred were loans to state-owned enterprises, assets that are typically difficult to restructure for a government 16 agency lacking independence. Importantly, the work of N-Part was hampered by a weak legal framework. The government attempted to mitigate the implications of a weak legal framework for N-Part by granting it legal super-powers. Yet, this strategy proved largely ineffective because the courts were debtor friendly and N-Part needed the approval of the borrower before it could proceed with the liquidation process. The track record of all three institutions regarding achieving their broader goal is mixed, at best. Sweden and Finland did not record any renewed banking system distress but real credit to the private sector contracted significantly in both countries in the years that followed the establishment of the AMCs, indicating, that the restructuring of banks was not yet complete (Table 2). While banks' lending to the private sector increased significantly in Ghana, state-owned commercial banks, that had been cleaned up through the loan purchase program, again appeared to experience problems in the mid 1990s. 17 Table 3: Restructuring Agencies Restructuring Objectives of Asset Transfer Outcome Key Factors Restructuring Agency Fir,land: * Established as a * Amounts of Assets Transferred: * At end 1997, Arsenal still managed 46.5 Favorable factors: Arsenal: clean up mechanism Assets transferred had a book percent of the assets that were transferred * Large amount of real assets transferred, including * Began activities in for the Savings value of FIM 42.9 billion. to it. client receivables made it easier to restructure and/or 1993 and is still in Bank and Skopbank. * Sectoral Breakdown of Assets: * By end 1997, Arsenal had disposed of 78 dispose as they are less "politically" sensitive issues operation. Expected * Manage, restructure Only non-performing loans were percent of the real estate assets it had taken involved (real estate considered more to be cyclical to close in year and liquidate NPLs transferred; real estate assets over. industry) 2000. Set up to and other holdings, amounted to 34%; client * Unclear to what extent Arsenal accelerated * Appropriate funding allowed Arsenal to mark assets to absorb non- in an orderly manner receivables 41%; assets under corporate restructuring and how active market value after transfer. performing assets. and at minimum management and other assets 25. Arsenal was in corporate restructuring.. * Arsenal's professional management and adequate * Public ownership. cost. 3 percent. * Real lending to the private sector remained skilled resources. * Stand-alone entity. * Criteria for Asset Transfer: All strongly negative in real terms in the years * Benign macro-environment. In 1994-95, real GDP non-performing assets were after the establishment of Arsenal. rebounded strongly and the economy expanded at 4- 5 transferred to Arsenal regardless percent. of type and size of loans. * Transfer Price: Book value. Unfavorable factors: * Transfer of all types of NPLs regardless of type and size of assets may have made it more difficult to use wholesale divestiture techniques and also required Arsenal to build up expertise in different areas. Ghana: * Restructure and * Amounts of Assets Transferred: * NPART failed to play a substantial role in Favorable factors: NPART. recapitalize publicly About 13,000 accounts were expediting or enabling corporate * While inadequate legal framework hampered the * Initiated operations owned govemment transferred to NPART. restructuring.. restructuring and sale of assets, an extra-judicial in 1990 and closed banks. * Sectoral Breakdown of Assets: * NPART functioned effectively as a tribunal was set up to mitigate the problem. However, in 1997,2 years * Restructure Corporate loans from state and collection agency and restructured its loan NPART was slow to make use of the tribunal which later than stipulated. companies and private sector companies across portfolio via extension of maturities or tumed out to often side with the debtor. * Wholly owned expedite corporate industrial and service sectors; modifications to terms and conditions. * NPART received substantial foreign aid in the form of govemment agency. restructuring. most loans were collateralized by * While govemment owned banks were money and technical support. A team of expatriate * Set up as * Maximize recovery plant, equipment and machinery. cleaned up through transfer of assets, and experts, among which two former US RTC officials, centralized stand- value to reduce * Criteria for Asset Transfer: Non- banks were operationally restructured, managed the operations of NPART. alone agency. fiscal burden on the performing assets otherwise state-owned commercial banks in Ghana Government. process of asset transfer non- appeared to be in financial difficulties Unfavorable factors: transparent. again in the late 1990s. At end 1997, * Large amount of banking system loans transferred * Transfer Price: Book value of govemment state-owned commercial banks (assets transferred amounted to 51 percent of banking assets excluding accrued interest. had NPLs exceeding 15 percent. system assets) and no clear eligibility criteria for the * Yet, lending to the private sector did type of assets to be transferred so that NPART ended recover and tumed strongly positive in up with disparate set of assets. 1992. Ghana: * Type of asset transferred. Over 50% of assets NPART. transferred were loans to state-owned enterprises, assets that are typically difficult to restructure for a govemment agency that lacks independence. 18 Restructuring Objectives of Asset Transfer Outcome Key Factors Restructuring Agency * Initial funding problems slowed down the establishment of NPART and the building up of professional expertise. * Senior management consisted of political appointees. * Lack of political independence of the agency. * Failure to coordinate corporate restructuring efforts being undertaken by various govemment agencies and NPART. * Weak legal framework. For example, asset sale was impeded by the fact that debtor had to agree with sale of assets. Sweden: Securum/Retriva: * Amounts of Assets Transferred: * Securum/Retrieva succeeded ininanaging Favorable factors: Securum: * Established as clean- Securum: Gross value: SEK 67 and selling assets in relatively short period * Type of assets - mostly commercial real estate - made * Set up in 1992 and up agencies/bad billion, 4.4 percent of total of time. it easier to restructure as the assets were less politically expected to operate banks for banking assets. * Most of Securum's and Retrieva's assets sensitive (layoffs); high concentration of the economy between 10 and 15 Nordbanken Retriva: Gross value SEK 45 were real estate assets. Shareholdings were may have made industrial restructuring easier. Also, years. Closed (Securum) and billion or 3.0.percent of banking mostly concentrated in construction transferred assets that were of particular type, size, and operations Gotha Bank assets. companies. Thus, while Securum may have structure limited the amount of assets Securum had to successfully in (Retrieva), two * Sectoral Breakdown of Assets: helped to expedite restructuring in the real deal with and made it a more manageable exercise. 1997. banks that 80 percent of assets were related estate and construction industry by * Private management and strong govemance * Public ownership. govemment had to the real estate market. enhancing the coordination among debtors, mechanisms which ensured the agency's * Set up as a stand- taken over. Securum: Loans 91.1 percent; its impact on the restructuring efforts in independence. alone agency. * Recover maximum share portfolio 6.2 percent; real other sectors of the economy appears * Prompt structured appraisal of assets and transparent Retriva: values of NPLs estate: 2.7 percent. limited. process of asset management, restructuring and sale. * Set up in 1993, was transferred to it, .Retriva: Loans 86,2 percent; real * In terms of restructuring of Nordbanken * Adequate legal framework. absorbed by establish "best share portfolio 1.6 percent; real and Gotha Bank, management was * Adequate funding. Securum in 1995. practice" in estate 12.3 percent. changed, they were operationally * Adequate skilled resources. Public ownership. corporate CmG-elia for Assei Transfer: resiructured and were successfuiiy soid to * Limited amount of assets being transferred (7.7 * Set up as a stand- restructuring for Mainly size and complexity of private investors. percent of banking sector assets). alone agency. private banks. loan: only loans over SEK 15 * Real lending to private sector by banks did * Recovery of real estate market. million were transferred, and not recover. In 1993/94 real credit to the * Recovery of economic growth. In 1994, real GDP they typically consisted of private sector contracted significantly. growth tumed positive. corporation with operations in different countries or Unfavorable factors: complicated structures in terms * Sporadic bouts of scandal due to the incentive- of subsidiaries. Both companies compensation scheme for employees. did not take over assets that could be securitized. * Transfer Price: Assets were transferred at book value. 19 V. Lessons from Cross-Country Experience Table 4 summarizes the main characteristics of the country cases including the size of the banking system and the depth of the capital market, the quality of the legal framework as measured in the enforcement of creditor rights and the arnount of assets transferred to the respective AMCs. As the Table indicates, initial conditions for AMCs were significantly weaker in the developing economies while at the same time AMCs in these countries had to deal with a notably larger problem as assets transferred to these agencies accounted for a large amount of banking system assets. For example, the legal framework was considerably weaker in developing countries and capital markets were less developed, as indicated by the low bond market capitalization. Governments in Ghana and the Philippines tried to compensate for the weak legal framework by granting superpowers to their respective AMCs (see Table 5). In both cases this strategy proved ineffective as despite strengthened creditor rights the courts remained either debtor friendly-Ghana-or the overall efficiency of the court system did not improve- Philippines. Table 4 Characterization of Country Cases Initial Conditions Private Peak level of sector Bond market NPLs Enforcement claims in capitalization (in percent of Amount of assets of creditor percent of in percent of financial system transferred (in percent of rights GDP GDP (Private) assets! financial sstem assets)d Finland 18.0 87 39.7 18.7 5.2 Ghana 1.0 6 NA 60.0 50.8 Mexico 6.0 41 1.1 18.9 17.0 Philippines 7.7 79 16.6c 23.1 21.7 Spain 8.0 88 43.2d 5.7 1.4 Sweden 24.0 145 58.5 10.8 7.4 Source: a. The product of an index of how well the legal framework protects secured creditors and a law and order index. Creditor right index taken from Porta et al (1997) and law and order index taken from International Country Risk Guide, various editions. The index ranges from 0 to 24 with 0 as the lowest and 24 as the highest score. d. author's calculation. b. IMF, International Financial Statistics. Private sector claims and bond market capitalization are shown at the onset of the financial crises in these countries. c. 1983. D. 1990. Table 5 presents an overview of the main characteristics of the AMCs established including its narrow objective, type of assets transferred-real estate assets or assets or loans to politically motivated loans-the independence of the agency, legal superpowers and funding resources. The table highlights that the success of the AMCs in developing countries was mainly hindered by the following factors. Firstly, AMCs in developing countries mostly received non-real estate, state-owned enterprise assets, or assets reflecting political connections. All of these types of assets tend to be harder to restructure especially for a government agency. Secondly, many AMCs in developing countries had to resolve large amounts of banking system assets and received assets regardless of their size. Thirdly, AMCs in developing countries were not set up as independent institutions and thus were susceptible to political pressure. Finally, they often lacked appropriate funding to dispose of assets quickly. None of the developing countries outsourced the management of the assets to the private sector, including foreign investment banks and advisors which could have compensated for the lack of independence and could have curbed the scope for political interference. Table 5 Characteristics of AMCs established Real estate Outsourcing assets (in Transfer of of percent of politically Agency has management Agency has transferred motivated Agency is legal to private appropriate funding assets) assets independent superpowers sector Finland 34 No Yes No No Yes Ghana Negligible Yes No Yes No No Mexico NA Yes No No No No Philippines Negligible Yes No Yes No No Spain 8.2 No Yes No No Yes Sweden 80 No Yes No No Yes USA 49 No Yes Yes Yes Yes, after initial problems a. Business strategy includes type, size and amount of assets transferred. It is judged to be appropriate if it is in line with the resources of the agency including its funding, its institutional capacity and independence from political pressure and the development of the capital markets. As a result, as Table 6 indicates, two out of three corporate restructuring AMCs did not achieve their narrow goals of expediting corporate restructuring. These experiences suggest that AMCs are rarely good tools to expedite corporate restructuring. Only the Swedish AMC successfully managed its portfolio, acting in some instances as lead agent in the restructuring process. It was helped by some special circumstances: the assets acquired were mostly real estate related, not manufacturing assets that are harder to restructure, and were a small fraction of the banking system, which made it easier for the AMC to maintain its independence from political pressures and to sell assets back to the private sector. Rapid asset disposition vehicles fared somewhat better with two out of four agencies, namely Spain and the US, achieving their objectives. The successful experiences suggest that AMCs can be effectively used, but only for narrowly defined purposes of resolving insolvent and unviable financial institutions and selling off their assets. But even achieving these objectives required many ingredients: a type of asset that is easily liquifiable-real estate-, mostly professional management, political independence, a skilled resource base, appropriate funding, adequate bankruptcy and foreclosure laws, good information and management systems, and transparency in operations and processes. In the Philippines and Mexico, the success of the AMCs was doomed from the start as governments transferred large amount of loans that had initially been extended by the originating banks based on political connections and/or fraudulent assets to the AMCs which are difficult to be resolved or to be sold off by a government agency. 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(94 - 95) * Liberalization of the financial system in 1989-90 which was not accompanied with from 3.6% by September 1991 an adequate strengthening of the regulatory and supervisory framework to 9.5% by September 1994 Centralized Approach: * Liberalization resulted in rapid asset/loan growth including consumer credit. Rapid and 11.3% by September 1995, * WA, part of FOBAPROA, a Restructuring credit growth strained credit assessment of bank accounts. and 18.9% at peak. Agency. * Privatization of banks in 1991/92 without ensuring that new owners were "fit and Insolvent Banks: Areas of Activities: privatization of determining 199192alityhou ensuring capthat newownerswere"fit * 9 out of 34 commercial banks * Only asset sale. proper or determining the quality of equity capital. -accounting for 18.9% of total * Political instability led to widened current account deficit and reduced demand by financial system assets. * Management and administration of loan portfolio foreign investors for Mexican securities. until sale was left with banks (an attempt was Financially weak banks: made to incentive banks to manage assets as 25% Resolution Mechanism adopted * 12 (excluding the insolvent of losses on loan sales was imposed on banks) banks) participated in * Authorities intervened in 9 banks (of 34 commercial banks). FOBAPROA's restructuring * Loan repurchase program was aimed at . The authorities implemented two programs: (i) a temporary recapitalization scheme, 1 bank in another restructuring of existing banks and cleaning up of program (PROCAPTE); and (ii) A loan repurchase/recapitalization program under recapitalization program. intervened and closed banks to sell them off to FOBAPROA's auspices. FOBAPROA purchased loans from banks in exchange for * Financially weak and insolvent new investors. 10-year nontransferable zero-coupon Government bonds. Eleven banks participated banks together accounted for in the program. 98% of financial system assets. Philippines Causes of Financial-Sector Crisis Banking System: Type of AMC: * At their peak level, system- * Rapid asset disposition agency. (81 - 86) * Increases in oil prices and international interest rates, coupled with deterioration in wide NPLs stood at 23.1 terms of trade and a widening current account deficit resulted in a balance of percent. Approach: payment crisis in October 1983. * Centralized approach. APT, Stand-alone agency. Insolvent Banks: * Improper sequencing of financial sector reform in period of macroeconomic and * Three commercial banks, 128 Areas of Activity political shocks led to widespread loose lending practices. Financial liberalization rural banks and 32 thrift * APT's mandate included the disposition of non- measures were not accompanied by a tightening of the regulatory and supervisory institutions failed; 2 other performing assets transferred from three GFIs; private banks were intervened. * APT was a rapid sale agency. Any restructuring * Concentration of lending to related parties and fraud and mismanagement. * The hardest hit were the largest of the asset was limited to physical enhancement Resolution Mechanism adopted ~~~~~~~~~~~commercial bank, the of the assets such as repairs. But even such Resolution Mechanism adopted Philippine National Bank enhancement operations were done on only a * Central Bank provided liquidity loans to ailing banks under oversight of central (PNB) and the Development minority of the assets that were sold. In fact, bank conservator. Bank of the Philippines (DBP), most assets were sold on "as is, where is" basis. both state-owned, which . In 199 1, its mandate was extended to include the * Unviable and insolvent institutions were liquidated and depositors paid off. became de facto insolvent in ity ministtion ofgovemment-owned . Authorities arranged for government financial institutions to take over 6 private for ney tof anc or controlled operations pursued under the comimercial banks; for nearly 50% of financial Government's privatization program. system assets. * PNB and DBP transferred non-performing assets amounting to 21.7 percent of total banking system assets to a government recovery agency (APT); government then recapitalized banks and assumed deposit liabilities equal to the book value of NPLs minus capital infusion; operational restructuring followed including reorganization of staff and management, setting up of new credit appraisal procedures etc. Rapid Asset Disposition Agencies Annex Table 1: Main Characterization of Banking Sector Crisis and Type of AMC Employed Spain Causes of Financial Sector Crisis Banking System Type of AMC: * Financial system NPLs non- . Rapid asset disposition agency. (77 - 85) * Accumulated losses during the 1 970s and early 1 980s, exacerbated by rising oil performing loans to total loans prices, double digit inflation and rigidities in the labor market and productive reached their highest levels at Approach: sector. These factors undermined the profitability and solvency of enterprises. 5.7 percent in 1985. * Centralized approach.. Not stand alone entity but part of Spanish Deposit Guarantee Fund which * Rapid liberalization of the banking sector following 1971 and 1974 reforms Insolvent Financial Institutions: acted as "bank hospitar' serving as a vehicle for facilitated the establishment of new banks and new branches but adequate * Crisis affected 52 of 110 rehabilitation of banks and liquidations. regulation and supervision fell behind. Many new banks lacked professional Spanish banks which together experience and ethical standards expected of sound bankers. accounted for more than 20% Areas of Activities: . Bank expansion was accompanied by the formation of large industrial bank groups of total deposits and 21 % of On a trial and erFor basis, rather than a systematic that gave rise ~~~~~~~~~~~~~~~ total net worth. approach, the Fund used any one or combination that gave rise to problems such as purchase with small down payment and of instruments to restructure the bank and extensive debt, use of relatively inexpensive deposit base for speculative facilitate its sale within a maximum of one year. investment in banks oflen with inflated purchase prices, cross-ownerships with These included: (i) partial or complete write-off other banks and evasion of lending limits to single borrowers. of capital and subsequent injection of capital; (ii) * Sharp decline-of the stock market during 1974-80 led banks and their related or interest-free or "special" loans; (iii) acquisitions controlling groups to tum to real estate investment. But as property prices fell, the of assets (nonperforming, real estate, moveable banks were forced to renew loans and capitalize interest arrears to their borrowers. assets, enterprises). * Assets that could not be sold to new investors of Resolution Mechanism Adopted banks or of banks that underwent liquidations were sold off. * 3 small institutions were liquidated. * 26 banks were taken over by the Spanish Deposit Insurance Fund, recapitalized and resold. * 20 RUMASA banking institutions were nationalized and later privatized. Rapid Asset Disposition Agencies Annex Table 1: Main Characterization of Banking Sector Crisis and Type of AMC Employed United States Causes of Financial Sector Crisis Banking System: Type of AMC: * Level of NPLs during height of * Rapid Asset Disposition Agency. (84 - 91) * During the late 1970s and early 1980s, high interest rates and an inverse interest S&L crisis: 3 percent. rate structure led to massiVe losses for thrifts that funded their long-term assets Approach: with short-term deposits. Insolvent Financial Institutions: . Centralized. RTC was created in 1989 as a * 1,295 out of 3,263 thrifts were temporary agency to resolve all failed thrift * The regulatory agency engaged in forbearance (weakening of capital standards etc) insolvent which accounted for institutions. and deregulated the S&L sector allowing thrifts to go into (on a limited basis) 13% of thrift and bank assets commercial real estate, unsecured consumer lending). Moreover, the insurance (USD 621 billion) Areas of Activities: coverage was increased from US $ 40,000 to US $ 100,000. * Liquidation agency for S&Ls declared insolvent by the Of fice of Thrift Supervision or former * Against the background of expanded opportunities and an incentive structure that FSLIC. favored risk taking, S&Ls expanded their activities rapidly. The decline in oil prices in the first half of the 1990s and the bursting of the real estate bubble in the * Purchase and assumption transactions where later half of the 1980s adversely affected the solvency of a large number of S&Ls. healthy institutions bid to assume deposit liabilities in exchange for receiving a * Structural problems of S&Ls: reliance on short-term deposits to finance long-term combination of assets and cash. fixed rate home mortgages in a period of rising interest rates caused depositors to look for more attractive investments, as deposit rates were controlled. Deposits * Accelerated resolution program through which were replaced by expensive borrowing, and S&Ls could not offer variable S&Ls that were believed to have good franchise mortgage rates. Consequently, asset earnings deteriorated, due to rising costs of value were sold. funding. * Deposit payoff and insured deposit transfer. * Lending authorities(?) of S&Ls greatly expanded by adding commercial lending. As a result, thrifts invested heavily in commercial real estate. When the real estate * Asset sale. crisis hit, towards the mid 1980s, nearly one third of the real estate industry was on the verge of collapsing. Resolution Mechanism Adopted * At first, regulatory authorities engaged in forbearance hoping that problems were temporary and could be resolved via recapitalization on a flow basis. * Moreover, the early resolution programs were limited in scope and largely unsuccessful (for example Management Consignment Program; the Southwest Plan, instituted for S&Ls in the Southern regions during which 329 insolvent thrifts were disposed off; establishment of an asset disposition program FAVA in 1985 which was dismantled in 1989. * In late 1980s, authorities moved much more aggressively against weak and insolvent institutions. In 1989, Resolution Trust Corporation was set up specifically to resolve all insolvent thrifts. Rapid Asset Disposition Agency: Annex Table 2: Main Characteristics of AMC Country Ownership & Legal Governance Structure & Disclosure Requirements Objectives of AMCs Example Structure of AMC Mexico Ownership: Govemance Structure: Objectives: * Public ownership: * Policy decisions are made by a Technical Committee whose members are the Minister of . FOBAPROA's original goal was to sell or recover (94 - 95) Central Bank. Finance, the central bank govemor, and the CNBV ( supervision body) president. assets as quickly as possible, through auctions, Legal Structure: Disclosure Requirements: securitization, or other market mechanisms. * Trust within the Central * Financial statements are not publicly available and the govemment does not disclose * Purchase of non-performing assets from banks was Bank publicly the amount of capital or other resources available to AMC. used as a restructuring mechanism for intervened Independence of AMC: banks as well as for banks remaining in operation. * Controlled by Central Bank and Govemment and susceptible to political pressure and interference. Philippines Ownership: Govemance Structure: Objectives: . Public ownership: * APT was supervised by an inter-ministerial body called Committee on Privatization * To seek an orderly and fast transfer of non- (81 - 86) National Govemment. (COP) with far flung responsibilities including (i) monitoring the status of the overall performing assets to the private sector and Legal Structure: divestment program and the process of the asset disposition, (ii) granting approval for the administer them pending disposal. terms for individual sales, and (iii) deciding on the amounts retained by APT from the * Asset Privatization proceeds of asset sales. Trust (APT) self- standing govemment * APT's financing was approved through the govemment's budgetary process & hiring of institution that served as staff was management's responsibility. the govemment's trustee for the disposition of * COP comprised the Minister of Finance, Director General of NEDA, Minister of Budget, assets. Minister of Trade and Industry and Minister for Govemment Reorganization. * COP was created initially for a period of 5 years and has remained a supervisory body for APT. Disclosure Requirements: * Not subject to any public disclosure requirements. * Is required to submit annual reports to the President of the Philippines, the Ministry of Finance and to Congress on the status of its asset disposition program including description of the individual assets sold, the purchasers, and agreed payment terms. Independence of AMC: * APT was subject to political interference as COP had wide ranging involvement in operations and had to approve each single asset sale. Furthermore, despite APT's procedures, it succumbed to Congressional criticisms on the sale price of the assets which resulted in a slowdown of the disposition process. Rapid Asset Disposition Agency: Amnex Table 2: Main Characteristics of AMC Country Ownership & Legal Structure of Governance Structure & Disclosure Requirements Objectives of AMCs Example AMC Spain Ownership: Govemance Structure: Objectives: * Public ownership * Governed by an eight member Board of Directors. Four members are bankers * Restructure banks for prompt resale by carving out (77 - 85) of acknowledged standing (appointed by the Ministry of Finance upon bad assets that new investors were unwilling to Legal Structure: proposal by the central bank), who serve in their individual capacity and not as take on. * Govemment Guarantee Fund was representatives of their banks. The remaining four are Directors of the central given the legal capacity in 1980 to bank. The Board is chaired by a representative of the central bank. * Prompt sale of carved out assets with the aim to assume bank ownership to initiate maximize recovery value bank restructuring in addition to its Disclosure Requirements: original mandate of ensuring * Annual audited financial statements were disclosed to the public. depositor protection. United States Ownership: Governance Structure: Objectives: RTCs stated objectives were both (84 - 91 ) * Public ownership * Initial structure: RTC management lay with FDIC. A high-level Oversight commercial and social namely: (egal4-91)cture: Board monitored RTC'a activities and was accountable for RTC's policy, Legal Structure: strategic planning and budget and was barred from specific case involvement. * Maximize net value of proceeds from S&L * RTC was established as temporary It consisted of the following five members: 1) Secretary of the Treasury resolution. federal agency (chairman); 2) Chairman of the Federal Reserve Board; 3) Secretary of * Minimize impact on local real estate and financial Housing and Urban Development; 4) Two executives from the private sector. market. * Modified structure at the urging of FDIC: the 1' structure resulted in confusion * Make efficient use of received funds. with regard to public accountability and contributed to friction between the FDIC and RTC management. In 1992, RTC became an independent * Minimize resolution costs. organization headed by a chief executive that was responsible for many of the activities assigned to oversight board and FDIC. The Oversight Board was * Social Mandate: maximize available and replaced by the new Thrift Depositor Oversight Board which representation affordable housing for low-to-moderate income from both RTC and FDIC and was primarily responsible for approving individuals. requests for govemment funds, reviewing policies and strategies. FDIC was relived of its management responsibilities. Disclosure Requirements: * Mandatory and extensive rennrting tn the Oversight Rnard * Publication of annual audited financial statements (GAO audit) * Information readily available to the public (RTC had a public information room, press releases on every resolution/closing and other RTC initiatives). Rapid Asset Disposition Agency: Annex Table 3: Legal Environment and Management of AMC Country Sunset Clause and if yes, Broader Legal Environment in which AMC Management of AMC and Quality and Funding of AMC Example was it honored operated Remuneration of Staff Mexico * No sunset clause. Adequacy of bankruptcy and foreclosure law: * FOBAPROA: Managed by the central bank. * Annual and special contributions * Lack of functioning bankruptcy system. from commercial banks and from (94 - 95) * FOBAPROA relied entirely on the staff of the lending extended to it by the central * Owing to political pressure, existing central bank and thus was affected by the lack bank; plus, borrowings from the foreclosure regulation was not allowed to be of expertise in administering asset resolution. central bank. May also borrow enforced from Dec 1994 to 1997, making it from the Government through the impossible for FOBAPROA's capacity to MoF. foreclose on NPLs. * Funding was insufficient and the Did AMC have any superpowers? If so, what type: lack of adequate funding severely * No. hampered asset sales. Philippines * 5 years (1987-91). Adequacy of bankruptcy and foreclosure law: * APT's Board of Trustees was appointed by the * Initial capital of P 90 million pesos * In the Philippines, foreclosure lenders that President of the Philippines (Chief Executive was equity through an (81 - 86) * To date, APT is still in want to foreclose on assets need to go through Trustee and 4 Associate Executive Trustees). appropriation from the national operation. In addition to the judicial process. budget; amounts authorized to be the non-performing loans, * The qualifications of the trustees hired in 1987 taken from the proceeds of APT was charged with the * Some loans from DBP and PNB were were as follows: the Chief Trustee was a disposition agreed by COP; annual divestiture of very large transferred with already existing legal respected banker and three associate trustees appropriations from the budget; govemment corporations disputes, including those on collateral were private businessmen. It is not cleaT if it external assistance; service fees in 1991 (with the intention foreclosure, that APT had to contend with. continued that way. levied on trusted assets as approved of being the Fund Manager b P foir the proposed Philippine * When APT lost its immunity from lawsuits * APT was empowered to hire its own staff, y COP. Privatization Fund); and strictly vis-a-vis the sale of assets, it further although it was envisaged that it would rely as thus Congress amended hampered disposition. The immunity meant much as possible on secondments from other APT's life to another five that APT could not be sued for the sale of the govemment entities. years, i.e., up to 1996. assets or could not be made subject to restraining orders to halt proposed sales. Moreover, APT could draw on exteral * In 1996, APT's lifetime expertise and outsourcing in areas where it was again extended until Did AMC have any superpowers? If so, what type: would prove costly to build up internal end-I1999. * Under its original statute, APT was provided expertise with immunity from lawsuits vis-a-vis the sale * Management of the assets pending asset sale of assets. APT lost those powers in 1991 was out-sourced to DBP and PNB, banks when the original statute under which it was which held NPLs prior to the transfer under a created expired. management contract with APT. * As 40-50% of the assets transferred remain in * Initially, APT staff were exempt from the APT's portfolio to this date, APT essentially standardization rule on Government salaries. lost the opportunity to divest the assets quickly Thus APT was able to attract skilled staff. while the immunity was still in force. However, when its lifetime was extended, this exemption was removed. According to APT's current management, it has had no problems in attracting skilled staff. Rapid Asset Disposition Agency: Annex Table 3: Legal Environment and Management of AMC Country Sunset Clause and if yes, Broader Legal Environment in which AMC Management of AMC and Quality and Funding of AMC Example was it honored operated Remuneration of Staff Spain (77-85) * No sunset clause. Adequacy of bankruptcy and foreclosure law: * Fund was professionally managed. * Equal contributions by the central Guarantee Fund is still in * The then prevailing laws governing bank and the Spanish banking operations. bankruptcy or liquidation dated from the I 919 * Executive director of the Fund (called its system. century and were therefore, archaic, complex, Secretary General) managed a staff (120 and inefficient. persons at its peak down to 40 in the late . Because the Fund was established 1980s) and consisted of commercial bankers, in the midst of the crisis and the * In particular, the recovery of creditors' claims lawyers, and technical experts. financial resources from the above was a very costly process. proved insufficient, the central * Salanies paid were slightly above those in bank was empowered by law to * Moreover, the lack of relevant professional commercial banks. make long-term loans at the skills of the judicial system's employees rediscount rate to the Fund, with no hampered efficient debt restructuring (whose limit. inclination was to simply reduce the size of debts). Did AMC have any superpowers? If so, what type: * The expansion of powers under the royal decree of 1990 gave the Fund legal status for bank restructuring that included asset resolution as one of the instruments. * With respect to bankruptcy and foreclosure, the Fund was/is not equipped with any extra- legal powers. United States . RTC was to cease Adequacy of bankruptcy and foreclosure law: * Professional management: Majority of RTC * Two categories of funding: existence at end Dec. 1996 * Existence of adequate and enforceable senior personnel came from the FDIC who (84 - 91) bankruptcy and foreclosure laws facilitated the were familiar and experienced with resolution -Government funding "loss funds" * Sunset clause honored resolution process. of insolvent institutions (unrecoverable expenditures) (RTC created in 1989 and -okn aia epne ob closed at end-95) Did AMC have any superpowers? If so, what type: * RTC made extensive use of private sector -Workig capital (expenses to be =~~~~~~~- PxT ha -1-A-owor wihncue:coeaor or ascdipifoan -l.d repaid eventually from interest on ta ...k ~ " r asset collection -right to void burdensome contracts; s Ls -authority to override certain state laws (e.g. . RTC pay le)vels weebsed on goernment billion in loss funds (initially USD branching rights); pay scales, but were somewhat higher (+I10%) 50 billion) but did not provide for because they included locality and other working butal -right to disavow claims by S&Ls borrowers. differentials. No special incentives other than working capital possibilities for awards based on special * Lack of working capital and delays * RTC had power to resolve thrifts through achievements in government funding hampered conservatorship or receivership speedy resolution. It forced institutions to stay in conservatorship for extended periods. Rapid Asset Disposition Agency Annex Table 4: The Asset Transfer Process Country Example Criteria for asset transfer Process of Asset Transfer Amount and Sectoral Breakdown of Assets transferred to and transfer price AMC Mexico * Criteria for asset transfer: * FOBAPROA would purchase loans from banks in an amount Amount of total assets transferred as percentage of total banking system (94 - 95) Process of asset transfer was equal to roughly two times the amount of new equity assets/banking system loans, and as percentage of GDP nontransparent; there were no (including mandatory convertible subordinated debt) that * P142 billion (P1 19 billion net of reserves for loan losses) were clear policies nor guidelines shareholders were willing to commit to bank. transferred. This amounted to 22.8% of the banking system's total developed for type of loans loans; or 17% of total banking system assets, and 11% of GDP that were eligible for * Loans were transferred at book value. transferal. Sectoral breakdown of assets transferred * FOBAPROA did not value nor write down loans * Assets transferred included consumer, mortgage and corporate * This led to perceptions that immediately after transfer because of a lack of funding and loans (Breakdown NA). some banks were receiving out of hesitation to reveal the true losses. more favorable treatment than Were any loans left in banks and if so, amount and type: others. * Yes * Transfer price: book value. Philippines * Criteria for asset transfer: * When assets were transferred, DBP and PNB had already Amount of total assets transferred as percentage of total banking system Transferred assets were those foreclosed on those loans. APT attempted to take title and assets/banking system loans, and as percentage of GDP (81 - 86) accounts whose individual possession of assets; if necessary it could file suits for the * Assets of about P 108 billion (US$ 5 billion equivalent) with book values amounted to recovery and protection of such assets. estimated recovery value of about US I billion were transferred to more than P10 million. APT which amounted to 21.7% of total banking system assets or * Assets transferred are valued by third party appraisers every 17.7% of GDP. * Transfer Price: Assets were three months. * As a consequence, the two public banks shrank dramatically. In transferred at book value. case of DBP, total assets were reduced from P 74 billion to P 10 billion and for PNB, from P 70 billion to P 26 billion. Sectoral breakdown of assets transferred: * Distribution of the 389 accounts: agriculture 37; government 44; manufacturing 159; mining 27; service, trading, utilities and others 116. * 70% of asset value was concentrated in 59 assets (or 15% of the accounts). Were any loans left in banks and if so, amount and type: * Yes, non-performing accounts each with a value of not more than P 10 million. * Estimated that these amounted to P 27 billion or 20% of the combined assets of the two banks, or 9-10% of the banking system assets. Rapid Asset Disposition Agency Annex Table 4: The Asset Transfer Process Spain . Criteria for Transfer of . Upon assuming control of the bank, the Fund removed the Amount of total assets transferred as percentage of total banking system (77 - 85) Ownership to Guarantee existing senior management and appointed a new assets/banking system loans, and as percentage of GDP: Fund: The transfer of control management team, performed due diligence, undertook * Of the 28 banks resolved through the Fund, most were absorbed of entire banks to the Fund restructuring measures such as securing and collection of by domestic and foreign banks. These banks accounted for x occurred at a shareholders loans, liquidation of fixed assets, reduction in financial costs percent of total banking system assets. Prior to their sale, assets assembly convened no later and cuts in staff and general overhead and design of a amounting to 373 billion pesetas were carved out and transferred than 7 days after the central financial assistance package. to the Deposit Guarantee Fund. bank's request. Beforehand, the Central Bank informed * Mostly the large domestic banks purchased or took over the Sectoral breakdown of assets transferred: shareholders of the extent of banks; the foreign banks that participated in the resale * Assets: Ptas 270 billion, equivalent to 72.4% of total 373 billion. losses and the impact of included: Barclays, BNP, BCCI Holdings, Citibank (in write-offs on the capital and consortium), Chase Manhattan. Legally, they had to offer * Real estate: Ptas 30.7 billion, or 8.2% of total. reserves of the problem bank. bank for sale within a year. * Shareholdings: 72.2 billion, or 19.4% of total. * Fund coordinated its operations closely with the central Were any loans left in banks and if so, amount and typ bank, especially in the early and final stages of intervention. W Yes. Performing assets were left in banks which were being sold. Both worked closely together in designing the financial packages that were the basis of negotiations for the resale of the bank. United States * Criteria for asset transfer: . Resolution Process: institutions were placed under RTC Amount of total assets transferred as percentage of total banking system (84 - 91) NA. conservatorship with the objective to prepare them for sale assets/banking system loans, and as percentage of GDP: (84 - 91) while preserving any franchise or business value. This * Assets taken over by the RTC: USD 455 billion, accounting for * Transfer Price: NA. process required establishing control, stopping speculative or about 8.5% of total bank and thrift assets (approximately 8% of abusive practices, identifying and evaluating assets and GDP). liabilities, minimizing operating losses, and beginning an orderly downsizing. . Assets sold via asset disposition (not as part of the institution or through collection): USD 153 billion, equivalent to 2.7% of GDP. * Then institutions were either sold in P&As, or through the accelerated resolution program, or resolved by deposit Sectoral breakdown of assets transferred: payoff or insured deposit transfer or liquidation. * 1-4 unit family mortgages:25% . Assets that could not be sold through P&As and other * Other mortgages: 17% methods were sotd ott via secuntization ot homogenous * Real estate:7% assets * Other loans:8% * Cash and securities: 35% * Other assets: 8% Were any loans left in banks and if so, amount and type: Not applicable. Rapid Asset Disposition Agency Annex Table 5: Process of Asset Dispositions Country Process of Asset Sale/disposition: timeframe, procedure (including type of auctions, Results of asset sale-Recovery per $ of assets Assets sold and assets Example when applicable) and type of assets sold sold that remain on books of AMC (as % of total) Mexico Was transfer of assets a one-off process? Result of Asset Sale: * Up to end of 1998, only (94-95) * Three rounds of assets sales; one occurred in 1995, and two rounds occurred in 1996. * P150 million face amount. 0.05 of assets were sold. Procedure for sale of assets: * Winners bid only 49% of face value, exposing the * One small trial auction was conducted which involved real estate backed assets amounting to authorities to criticism from the opposition and 0.11% of total loans purchased from banks in 1997. from certain quarters within the government. Purchaser of Assets: The winning bidder for the one auction that took place in August 1997 was a joint venture that involved Goldman Sachs. Philippines Was transfer of assets a one-off process? Result of Asset Sale: * 40-50% of assets still * Yes. * APT reached its 1987-91 sales target of US$ I remain in APT's (81 - 86) billion (out of the transfer value of $5 billion) in portfolio. Procedure for sale of assets sales atler privatizing all or part of 245 of the * Assets were sold through public bidding but also negotiated sales in exceptional cases. total accounts. * In instances where public auctions "failed" to result in a sale twice, APT could undertake a * 50-60 % of original assets transferred were sold negotiated sale. The Commission on Audit had to approve the lahter type of transactions. over 11 years, i.e., since APT's creation in 1987. * APT obtained three appraisal values from third party appraisers. Then an announcement would be Purchaser of Assets: Not applicable. published to invite bidding on the assets with information on the asset, the company, the bidding process, the appraised value. Operating principles gave preference to domestic buyers and excluded former owners. In reality, Timeframe: some former owners succeeded to reduce their * The average time it took to sell assets through public bidding was one month from the date when assets and DBP bought back some loans. the invitation for bidding is published. * Two forms of pricing: (i) an indicative or base price - the appraised value; and (ii) open pricing. * The auction method was the prefenred procedure and APT's public announcement provided information of the asset's appraised value. If two auctions did not result in a sale, APT resorted to open pricing. If the latter still failed to yield a sale, then the asset could be offered for a negotiated sale. * In case of open pricing, if the fai market value is deemed to exceed the highest bid received, alternative procedures could be followed to try to get as close to the market value through a negotiated sale. Rapid Asset Disposition Agency Annex Table 5: Process of Asset Dispositions Country Process of Asset Sale/disposition: timeframe, procedure (including type of auctions, Results of asset sale-Recovery per $ of assets Assets sold and assets Example when applicable) and type of assets sold sold that remain on books of AMC (as % of total) Spain Was transfer of assets a one-off process? Result of Asset Sale: * The Fund has been able * Generally, bank take-over was a one-off process. However, the Fund intervened twice in the * Sale of Banks. Of the 29 banks resolved through to sell almost (77 - 85) Banco Industrial del Mediterraneo, in 1980 and 1982. the Fund and most were absorbed by domestic everything. But, they and foreign banks. have still have a Process of asset sale: minimal amount of * Assets were sold through (i) divestiture of stock holdings of the Fund in firms or holding * Mostly large domestic banks purchased or took assets. companies or liquidations; (ii) sale of real estate acquired; (iii) sale of portfolio of security over the banks; the foreign banks that participated holdings; (iv) sale of loans (no information on selling methods). in the resale included: Barclays, BNP, BCCI Spain.Accumulated losses/profits: Holdings, Citibank (in consortium), Chase Spain Accumulated losses/profits: Manhattan. (77-85) * Purchase of assets continued through 1985 and the sale of most assets have been completed. According to the Deposit Guarantee Fund's 1986 annual report (taken as year crisis subsided): * Sale of Assets. With regards to the loans that -Losses related to clean-up of banks: Ptas 25.7 billion could not be sold to the new investors of the -Accumulated losses: 90 billion pesetas. banks, sale of mortgage loans and real estate proved most successful. Most assets were sold but a few still remain in the Fund's portfolio. Purchaser of Assets: Both domestic and foreign United States Was transfer of assets a one-off process? Not applicable. Result of Asset Sale: * RTC assets at book (84- 91) Timeframe: assets remained in conservatorship for 13 months on average before liquidation * Recovery rate: value ($455 billion Procedure & Type of Assets sold: -86 cents to the dollar (losses at disposition/total remained on books) of assets taken over by the RTC). which: * RTC asset disposition tools for assets that were not sold to acquiring bank thrift (in general about -Assets sold: 33% 21 % of assets was passed on to acquirers, mostly securities and 1-4 family mortgages): -In general, wholesale asset sales (securitization, -Collections:3 1% bulk sales, equity partnerships and auctions) had -Cash & Securities:10% -Securitization (accounted for 27% of assets sales): primary method for sale of all performing 14 higher net recovery rates compared to retail sales -Assets transferred to family mortgages. multi family and commercial mortgages; and consumer loans. (nrivztp. rnntr,mtnrq hnernime nf faster diasno.itinn nurchaser of thrifhs 11 N -Bulk portfolio sales "structured transactions"(14% of asset sales): primarily used to dispose off rate and shorter holding periods. -Losses:13% non-performing commercial mortgages and problem real estate. Method used to achieve high -The recovery rate ranged from 98% for -Remaining assets velocity of sales since selling commercial assets one by one would have taken years. It took securities, 96% for 14 family mortgages, to 55% (transferred to FDIC) generally up to 9 months to package and close the sales of such large pools of assets (almost 70 % for real estate. 2%. were in pools over $ 200 million each). -Of 747 resolved thrifts, 497 were purchase and -"Equity participation" (11% of asset sales): designed to dispose off non-performing loans and assumption (P&As), 158 were insured deposit certain real estate. The RTC, as a limited partner, contributed assets to the limited partnership pay-offs, and 92 were uninsured deposit payoffs. while the private sector partner (general partner) was responsible for the management and disposition of assets. The cash flow derived from asset disposition was the divided (on a predetermined basis) between the RTC and the general partner. Rapid Asset Disposition Agency Annex Table 5: Process of Asset Dispositions Country Process of Asset Sale/disposition: timeframe, procedure (including type of auctions, Results of asset sale-Recovery per $ of assets Assets sold and assets Example when applicable) and type of assets sold sold that remain on books of AMC (as % of total) United States -Auctions (2% of asset sales): used to sell a large volume of relatively small homogenous assets at Purchaser of Assets: a single event For these auctions, RTC stratified loans to produce homogenous packages - assets (84 - 91 ) were auctioned according to type, asset size and location. Loan assets used for the auctions were Mostly domestc insttutonal investors, but there mostly non-performing. were intemational investors as well. In addition, the RTC had a special program targeted at -Outsourcing to private companies - referred to as 'Yetail" asset disposition method in contrast to smaller investors (limited program). Purchasers "wholesale" for the above mentioned programs (21% of asset sales): one of the principal methods had to sign eligibility certificate, in which they to dispose off more complex and diverse portfolios including commercial, consumer and credit basically certified that they were ethical and had card loans; commercial and residential real estate; and subsidiaries assets. Private contractors were not previously been responsible for causing paid on a fee basis, which included perfornance-based fees (depended on speed of asset sales and losses at a failed institutions. amounts recovered). -Affordable housing program (1% of assets sales): in compliance with the RTC social mandate, more than 100,000 units of affordable housing (single and multi fanily units) sold to lower-incomne families accompanied by seller financing facilities. Other sales (24% of asset sales): included fumiture, fixtures, equipment, loans and real estate sold by RTC field offices. Accumulated losses/profits: * Since inception and through 1995, RTC losses anounted to USD 88 billion of which -Realized losses and expenses (89 - 95): USD 81 billion. -Estimated future losses: USD 7 billion. Losses include operating expenses and losses from assets sales. _ Restructuring Agencies Annex Table 6: Main Characterization of Banking Sector Crisis and Type of AMC Employed Country Causes of Financial Sector Crisis/Resolution mechanism adopted Magnitude of financial sector Type and Structure of AMC set up Example by the government crisis Finland Causes of Financial Sector Crisis Banking System (total): Type of AMC: * 18.7% of loans were non- . Restructuring agencies. (91 - 94) * Liberalization of financial sector in late 1980's without appropriate performing by end of 1993. - Sponda: set up for Skopbanks real estate assets. strengthening of regulatory and supervisory framework, particularly in - Solidium: set up to deal with claims on one industry group. savings bank sector. Insolvent Banks: - Arsenal: set up to manage problem loans and other loans of SBF * Libraliztion ed t rapi credt groth wich sraine finacial-Skopbank: accounting for 5.1% of and to liquidate itS real estate assets and other holdings. t Liberalization led to rapid credit growth which strained financial total banking system loans; Essentially used to wind down SBF. institutions credit assessments and monitoring capacity particularly in savings sector. -SBF: (new entity in which 41 - STS: which assumed all NPLs and 'bad' assets of STS Bank. (solvent and insolvent) savings Approach * Break-up of Soviet Union and with it collapse of Finnish export banks were merged in 1991). SBF Arsenal: business. accounted for 23.9% of total * Stand alone entity. . Devaluation of markka by over 30%, which adversely affected deposit financial system assets; . In the end, centralized approach, as some of Skopbank's real money banks as they were indirectly exposed to foreign exchange risk. -STS Bank: accounting for 2% of estate assets and STS assets are transferred to Arsenal. Resolution mechanism adopted financial system assets. Areas of Activity Arsenal: * In 1991, the central bank took over Skopbank. * Credit Administration: granting new loans and guarantees, * In 1992, the govemment (i) offered capital support facility for deposit collection of receivables, corporate restructuring and legal money banks and injected up to 12% of the sector's regulatory consulting prescribed capital into the sector; and (ii) set up the Government * Real Estate: Management, leasing and liquidation of property Guarantee Fund (GGF) "to safeguard the stable functioning of the portfolio. Arsenal does not engage in construction management. banking system". However unfinished property development projects can be * GGF supported 41 savings banks (later amalgamated to form the completed if it is probable that the overall result is better than Savings Bank of Finland (SBF)) with capital injection and issuance of through selling unfinished project. guarantees. SBF's performing loans were sold whereas its NPLs were * Customer support in terms of corporate evaluation, acquisitions moved to a restructuring agency. and corporate restructuring. * In 1993, the government intervened in STS Bank and issued a guarantee * Treasury and capital market operations, by which group refinances on bank liabilities to bolster (foreign) investors' confidence. and monitors the liquidity, maturity and interest rate management risks, and which also manages equity portfolio. Ghana Causes of Financial Sector Crisis Banking System: Type of AMC: a Level of non-performing loans . Restructuring agency. (82 - 89) * Financial liberalization in the mid-1980s resulted in liquidity and amounted to C59 billion or 60% of solvency problems in the banking sector due to: total at end 1989. Appoach: - serious shortcomings in bank regulations and inadequate banking * Stand alone entity. Centralized approach. supervision; Insolvent Banks: - deficient bank management and poor procedures and controls; and * 7 out of 11 audited major banks Areas of Actvity: - massive devaluation and dismantling of protection barriers as part of were insolvent. * NPART's Operating Policies stated that: "Recovery should allow a structural reform program leading to increased indebtedness of the for reasonable wotk-out arrangements with existing debtors. corporate sector and reduced capacity to service its debt. Where work-out arrangements were not feasible or promising, NPART would dispose of the productive assets on a "going * The heritage of accumulated enterprise losses following years of high concern" basis. Liquidation sale would be undertaken only where inflation, macroeconomic instability and devaluation aggravated loan efforts with sale on a "going concem" basis failed or appeared losses in the banking system. remote." Annex Table 6: Main Characterization of Banking Sector Crisis and Type of AMC Employed Country Causes of Financial Sector Crisis[Resolution mechanism adopted Magnitude of financial sector Type and Structure of AMC set up Example by the government crisis Resolution mechanism adopted * A large part of NPLs owed by public and private to 7 enterprises banks were transferred to NPART, a restructuring agency in exchange for govemment bonds. * Advances to the govemrnment and SOEs were first offset against govemment loans and the rest was converted into equity. Sweden Causes of Financial Sector Crisis Banking system: Type of AMC: * Financial system NPLs at end of * Restructuring Agencies. (91 - 94) * Liberalization of financial sector in 1980s without appropriate 1992, 10.8 %. Crisis was - Securum: set up to manage NPLs transferred from Nordenbanken strengthening of the regulatory and supervisory system. considered systemic as five of the - Retriva AB: set up to handle all non-performing assets of Gotha * Led to lending boom which strained credit assessment and monitoring six largest banks were involved, Bank skills in banking sector and which amounted to over 70% of - Mandamus: set up to manage real estate assets and shares in banking system assets operating companies taken over from ForeningsSparbanken * To protracted real estate boom (high investment in real estate also due Insolvent Banks: Approach: to tax laws that favored borrowing over savings). -Nordbanken and Gotha Bank, * Stand alone entities. * Swedish economy deflated in 1990 and real estate bubble burst, high accounting for 21.6% of banking . Decentralized approach. interest rates and recession increased loan losses to banks. Crisis for system assets. * Govemment set up separate AMCs for Nordbanken and Gotha krona led to very high interest rates (up to 500%) and later to a -Sparbanken Foresta AB, Bank, Securum and Retriva, repectively; substantial depreciation of the krona when it started to float. Both accounted for 24% of banking . Private banks who needed Govemment assistance, they were events undermined the capability of many borrowers to service their assets required to set up their own AMC. Example: Mandamus. debt. debt. Financially weak banks: Areas of Activity Resolution mechanism adopted - Four major banks accounting for . Securum: 60% of banking system assets - Restructures NPls including taking ownership position and * Govemment first dealt with the crisis on an ad hoc basis by merging controling management of firms. Sparbanken with Swedbanken; intervening in Nordbanken and splitting - Provide new loans to borrowers bank into a good bank and an asset management company Securum. - Trade securities. * At end 1992, the govemment issued a blanket guarantee on bank - Liquidate nonviable companies. liabilities and took over Gotha Bank, wrote its share capital down to Retriva: zero and transferred NPLs to another AMC. Moreover, the govemment - Restructures NPIs including taking ownership position and introduced a voluntary bank recapitalization plan which laid out controling management of firms. conditions under which it would provide capital support for remaining - Provide new loans to borrowers banks in the system. (None of the remaining private banks made use of - Trade securities. the support scheme). - Liquidate nonviable companies. * In 1993, Nordbanken and Gotha Bank were merged as well as their * Mandamus: respective AMCs. - Manages real estate assets and shares in operating companies taken over by ForeningsSpar-banken and in conjunction with this, handle problem loans and workout loans. Restructuring Agency: Annex Table 7: Main Characteristics of AMC Country Ownership & Legal Structure of Governance Structure & Disclosure Requirements Objectives of AMCs Example AMC Finland Ownership: Governance Structure: Objectives 91 -94) * Public. The Government of Finland Arsenal: Arsenal: (91 94) owns 79% and the Government * Board of Directors consists of 2 members from the private sector and 4 members appointed by the MoF, * To manage and Guarantee Fund owns 21.1%. the Ministry of Industry and the Prime Minister liquidate NPLs and other holdings, in an Legal Structure: * Overall, Operations are supervised by Government Guarantee Fund, State Audit Office and parliamentary orderly mianner and at a Arsenal State Auditors. minimum cost. * Limited joint stock company govemed by the Finnish Govemrnent * Public Meeting appoints Senior Management and Board of Directors Act. Disclosure Requirements: * Changed to limited public company Arsenal: in Feb. 1998, due to change in * Publishes Annual report with audited annual financial statements. legislation which prescribed * Website contains interim reports, key figures on company's capital and shareholders companies listed in Helsinki stock exchange to be set up as public * Monthly reports are also available to the public. companies. Independence of AMC: Arsenal: * Arsenal is managed by a professional management team. Its activities are overseen by a Board of Directors which consists of 4 members from Gov't sector and 2 members from private sector. The CEO was brought from the private sector. The organization follows legislation and is fully independent on daily decisions. Ghana Ownership: Governance Structure: Objectives- * Wholly owned government agency * Govemed and supervised by a Board of Trustees consisting of representatives from the Ministry of * Restructure and (82 - 89) Finance, the central bank, the chief administrator of NPART, an accountant and a private lawyer and recapitalize banks. Legal Structure: three other experts (one from the private sector). The Board was responsible for formulating NPART * Asset management * Govemment Agency set up in 1990, guidelines and supervising its management. activities was aimed at considerably much iater af'ir 'tzg marxrnnizig rcIuuveiy crisis began. Disclosure Requirements: value to reduce fiscal * No activity nor financial statements were published. burden on the * Annual audited financial reports were submitted to the Board of Trustees. govemment * Annual report on the management of NPART submitted to the Provisional National Defense Council. * Financial reports were also submitted to the Ministry of Finance and Central Bank and the implementing agency for the World Bank's FINSACI. Independence of AMC: * Government heavily involved in decision-making process as it dominated the Board of Trustees.. * Moreover, head of NPART was a political appointee who was selected not on the basis of technical skills. Annex 'lable 7: Main (Charactenstics ot AMC Country Ownership & Legal Structure of Governance Structure & Disclosure Requirements Objectives of AMCs Example AMC Sweden Ownership: Govemance Structure: Objectives: * SecurumlRetriva:Public ownership Securum/Retriva: Securum/Retriva: (91 - 94) * Board of Directors appointed by Ministry of Finance. Senior management appointed by Board of * Recover maximum * Mandamus: Private ownership Directors. All members were from private sector except for one member of Board of Directors who was a values of NPLs MoF official. transferred to it. * Establish best practices Legal Structure: * Operations monitored by Bank Support Authority, which represents the Swedish State. for private banks. . Securuni/Retriva: Limited public * Market Committee consisting of representatives from various business organizations monitored projects' * Clean up of Nordbanken companies govemed under corporate sound business practices to ensure credibility and Gota Bank. law. * Irregularity Committee established by Board of Directors to investigate any irregularities and verify cases Mandamus: * Mandamus: subsidiary of of fraud * Commercial ForeningsSparbanken. Disclosure Requirements: Securum/Retriva: * Publishes annual reports with description of operations and activities of the year, and audited financial statements. In addition, interim (quarterly) reports are also made public. Independence of AMC: Securum/Retriva: . Publishes annual reports with description of operations and activities of the year, and audited financial statements. In addition, interim (quarterly) reports are also made public. Restructuring Agency: Annex Table 8: Legal Environment and Management of AMC Country Sunset Clause and if yes, Broader Legal Environment in which AMC Management of AMC and Quality Funding of AMC Example was it honored operated and Renumeration of Staff Finland Arsenal: Adequacy of bankruptcy and foreclosure law: Arsenal: Arsenal: (91 -94) . The Group's operations * Legal environment is adequate regarding bankruptcy * Professionally managed. * State provided Arsenal with FIM 22.8 (91 - 94) are expected to continue and foreclosure laws billion in equity capital and has issued until the end of the * Private sector wage scale. No guarantees totaling FIM 28 billion to century. Did AMC have any superpowers and if so what type of performance related wages. safeguard its funding. super-powers . No. * Moreover, Arsenal raised xxx in capital markets. Funding has been sufficient. Especially, Arsenal had sufficient equity capital to write down the loans that were transferred at book value. Ghana * Six years. NPART was Adequacy of bankruptcy and foreclosure law: * Head of agency was a political * Funding from proceeds in the blocked to have been closed * Legal framework was satisfactory; however, appointee who was not selected for his accounts of the Bank's adjustment (82 - 89) down by end Dec. application and implementation of the laws were technical skills. He had no prior credit (FINSACI), bilateral grants, 1995. appalling. Contract disputes could take 3-6 years to business experience. proceeds from sale of acquired assets. resolve. To meet administrative expenditure, * On account of some * Internal problems arose due to the NPART initially received budget slackening in the pace Did AMC have any superpowers and if so what type of inexperienced timid, distracted allocation for the first 2 years from the of recovery by 1995, super-powers: leadership of NPART and its poor Government through the grants or loan and to enable NPART to * After NPART was established it became apparent that relationship with the Ministry of accounts. wind up its residual a backlog of court cases would hamper the Finance and the central bank. operations and to make disposition of assets and the tribunal was formed * NPART had problems with funding its collections for COOP legally to circumvent the long delay if disposition * NPART received extensive technical operations in its early days resulting in bank (not included in was left up to the courts. assistance under FINSACI for delays in bringing NPART staff on the 1990 transfer), its financing a team of expatriate experts, board, acquiring computer hardware mandate was extended * Thus, a special judicial was set up outside of the court two of whom had previous expenence and software. With the backing of a by 18 months. It closed system which only became operational I and % years with the U.S. RTC. These two experts World Bank's FINSAC I, the problem in June 1i997. aftepr NPART's crrepatiA became NPART's directors of became less ancnte. Operations and Finance. With the locally recruited director of administration, NPART's middle management was stronger than its top administrator. Also, many of the staff were recruited from the banks. * NPART had an attractive salary structure as it was exempt from the limits imposed on public sector wages. Staff were actually paid more than their counterparts in the private banks. Annex i avce a; -egai nuviromnent anu iviLanagement OI A[V1k Country Sunset Clause and if yes, Broader Legal Environment in which AMC Management of AMC and Quality Funding of AMC Example was it honored operated and Renumeration of Staff Sweden Securum/Retriva: Adequacy of bankruptcy and foreclosure law Securum: Securum: Expected to operate up * Legal environment was adequate regarding * Professionally managed. * Received SEK 14 billion in equity and (91 - 94) to fifteen years. Assets bankruptcy code and foreclosure laws. SEK 10 billion in loan guarantees. were sold faster than . Private sector pay scale including Nordbanken provided SEK 27 billion in anticipated as property Did AMC have any superpowers and if so what type of performance related bonuses. Generous the form of loans at favorable rates. markets and economy as super-powers severance packages were adopted to a whole recovered much * AMCs had no special legal powers attract high caliber people. Retriva: faster. Closed down * Received SEK 3.8 billion and SEK 3.5 after 5 years billion in guarantees. * In both cases, funding was sufficient. Restructuring Agency: Annex Table 9: The Asset Transfer Process Country Criteria for asset transfer and Process of Asset Transfer Amount and Sectoral Breakdown of Assets transferred to AMC Example transfer price Finland Arsenal Arsenal: Amount of total asset transferred as percentage of total banking system assets/banking * Criteria for Transfer; All NPLs * In terms of credit administration, clients were system loans and percentage of GDP (91 - 94) without exception. initially assessed by outside consultants and Arsenal: * TTansfer Price: Transferred at classified into viable and non-viable. A client was * Gross value (1993): FIM 39.5 billion, or 5.2% of total banking assets (8.2% of GDP). * Tranfer Prce: Tansfered at considered to be viable if it could, through own book value. activities and with temporary support, develop a * After write-downs, 28 billion or 3.7% of total banking assets (5.8% of GDP) profitable operation. Qualified clients would start a corporate restructuring program to increase client STS: company's profitability in order to enable it to * Gross value FIM 3.4 billion, 0.51% of total banking assets (0.66% of GDP). return to the ordinary banking system. Sectoral Breakdown of loans transferred to AMC * Arsenal assumed in 1993 real estate at a book value that was substantially higher than the market Arsenal: value at the time. To estimate the current market * Real Estate: 33.7% value, external surveyors were assigned to perforn * Client receivables: 41% a complete real estate portfolio valuation in 1994, before process of management and liquidation took * Assets under management and other assets:25.3% place. Were any loans left in banks and if so amount and type (i. e. Ioans deemed unviable, corporate loans etc) . No. Arsenal took responsibility for all non-performing loans and assets transferred from SBF. Ghana * Criteria for Transfer: * Central bank assumed the lead role in the Amount of total asset transferred as percentage of total banking system assets/banking Nontransparent as there were acquisition process because NPART was not yet system loans and percentage of GDP (82 - 89) no specific criteria developed. operational. * About 13,000 accounts were transferred to NPART. * Transfer Price: Book value of * In theory, NPART evaluated and categorized * Loans transferred amounted to C50 billion equivalent to 50.8% of total outstanding assets excluding accrued enterprises as nonviable or potentially viable, the loans and 6% of GDP. it A - Amnrehencive due latter ern in heinrp made candidates for a cornorate ... Ire---- - --- ___1 - _11.1 ~~~~Sectoral Breakdown of loans transterred to AMC diligence exercise was not restructuring program. However, categorization conducted on any of the assets was done by N-part personnel and not via , Corporate loans from state owned and private companies across the industrial and subject to transfer to NPART. independent thrid party review. service sectors. Some were backed by real estate, including houses, but most of the Specifically, the central bank loans were collateralized by plant, equipment and machinery. restricted its efforts to o It r y effort wer oused on the 250 largest Were any loans left in banks and if so amount and type (i. e. loans deemed unviable, validating the eligibility of accounts representing 89% of the total non- claims and tracking ~~performiing assets. corporate loans etc) movemens, and trckngYes. movements, receipts and * NPART screened those accounts for classification disbursements, interest and into 4 categories: foreclosure, sale, workout/ other charges within the restructuring and write-off. accounts. Annex Table 9: The Asset Transfer Process Country Criteria for asset transfer and Process of Asset Transfer Amount and Sectoral Breakdown of Assets transferred to AMC Example transfer price Ghana * Following the classification, NPART assigned a recovery estimate, in percentage and amount to (82 - 89) each individual account. * As part of normal work-out activities, NPART's staff performed this function as they received extensive training from the expatriate experts on loan workout, asset appraisal, property inspections, etc.. However, its role in corporate restructuring was limited. Sweden Securum/Retriva: Securum/Retriva: Amount of total asset transferred as percentage of total banking system assets/banking * Criteria for Transfer: Mainly * Before assets were transferred to AMCs, they had system loans and percentage of GDP: (91 94) size and complexity of loan: to go through valuation process to assess true Securum: only loans over SEK 15 million market value. Grum: were transferred, and they * Gross value:SEK 67 billion, 4.4% of total banking assets (4.6% of GDP). After write- typically consisted of * One-off process, non-performing assets of down: SEK 50 billion 3.3% of total banking assets ( 3.4% of GDP). corporations with operations in Nordbanken & Gota Bank transferred to Securum Retriva: several countries or and Retriva, respectively. * Gross value SEK 45 billion or 3.0.% of banking assets (about 3.1% of GDP). After complicated structures in terns write-down, SEK 19.5 billion or 1.3%% of total banking assets (1.4% of GDP). of subsidiaries. Sectoral Breakdown of loans transferred to AMC * Transfer Price:NPLs were transferred at book value. Securum: * Mostly real estate loans. * Private AMCs: NPLs transferred at market value, * Loans: 91.1%. Share portfolio: 6.2%. Real Estate: 2.7%. consisting of loans of parent bank. Retriva: * Loans: 86.2%. Real Estate: 12.3%. Share portfolio: 1.6%. Were any loans left in banks and if so amount and type (i. e. loans deemed unviable, corporate loans etc) Securum/Retriva: * All NPLs with assessed value under SEK 15 million, or of low level of complexity (i.e. mortgages, consumer credits) were not transferred to AMCs. * Banks were left with a ratio of bad loans similar to the one prevailing in market. Restructuring Agency: Annex Table 10: Process of Asset Disposition Country From Debt Restructuring to Asset Sale Number, type and amount of Assets sold and assets that Example loans forced into bankruptcy, remain on books of AMC (as % restructured of total) Finland Was transfer a one-off process? Arsenal: Transfer of assets was a one time event . Of an initial portfolio of FIM . Arsenal: Total RE portfolio 11.4 billion corporate and after write-downs was FIM 8.5 (91 - 94) Criteria used for loan workout: Arsenal: Loan goes through valuation process as in any regular bank. private clients in 1993, 69% had billion; by end 1997, Arsenal Viability is determined on a case by case basis. A client is considered to be viable if it can, through own been forced into bankruptcy by had sold FIM 5.9 billion, or activities and with temporary support, develop a profitable operation. June 1997 78.4%. Instruments applied (partial debt write off, debt-to-equity swap, change of maturity) Mostly used debt-to- * 31 % of initial portfolio had not * Market value of assets equity swaps for restructuring. been forced into bankruptcy. Of transferred amounted to FIM 28 Process of asset sale/disposition: Arsenal used negotiated sales method. these 1.1 billion, or 9.8% of billion. At end 1997, FIM 13 initial portfolio were retumed to billion remained in Arsenal's Purchaser of assets: 100% domestic regular banking system portfolio, equivalent to 46.5 Accumulated losses/profits: percent. Arsenal: Losses had reached over FIM 18 billion by the end of 1997, from original transfer of assets worth 39.5 billion. This figure includes the acquisition of STS Ltd. STS: Before being acquired by the Arsenal Group, STS had incurred in losses of FIM 2.5 billion against total (face) value of assets originally transferred of about FIM 3.4 billion. Ghana Was transfer a one-off process? Yes * Initially, the staff had to . By June 30, 1997 when it was determine the accuracy of the closed down, NPART had (82 - 89) Criteria used for loan workout loan records. recovered a total amount of * Original idea was to restructure enterprises that were classified as viable. Criteria for loan work-out: C19.61 billion or 32% of its the default to the bank was not willful, capacity to revive and profitably operate (including managing) . As of April 1993, the resolution original portfolio of C59 the enterprise was assured, market prospects remained good, necessary working capital and other of loans of 203 enterprises with billion.). required resources were available, conditions leading to the previous default or difficulties identified debts of C38.45 billion (65% of and properly addressed and recovery prospects remained good. total NPART assets) was as * About C610 million were sold follows: outright with concurrence of the . The Government commissioned a study to assess the magnitude and nature of corporate distress and i. foreclosures for 94 firms with debtor. (Equivalent to 1% of recommend a project to facilitate the restructuring of potentially viable enterprises. The first phase of C14.5 billion (37.7%); the total portfolio of C59 the study which reviewed a sample of 214 firms concluded that a majority of them had good prospects ii. restructuring for 89 firms with billion.) for viable onerations if they undergo financial, technical and managerial restructuring. The second C 2 9 hillinn (330): phase examined the altemative institutional anrangements for the restructuring and recommended the iii. pay offs at full/discounted establishment of an investment bank to carry it out. However, two new private merchant banks opened value for 10 firms with C414 in 1990 in addition to a previously existing Merchant Bank and thus the proposal was rejected. million; In the end, enterprise restructuring became mired in political problems and assets were basically sold iv. write-offs for 3 firms with off. Cl.45 billion; and v. other for 7 firms with C9.2 Instruments applied (partial debt write off, debt-to-equity swap, change of maturity) billion (23.9%). Process of asset sale/disposition: . Negotiated sales. NPART advertised the assets subject to foreclosures in the local papers upon which interested buyers approached NPART. Purchaser of assets: Domestic investors mainly and some foreign investors purchased the assets of those subject to foreclosures. .AJWOI.1 J.IS ALLLJ 115CXt11t . Annex Table 10: Process of Asset Disposition Country From Debt Restructuring to Asset Sale Number, type and amount of Assets sold and assets that Example loans forced into bankruptcy, remain on books of AMC (as % restructured of total) Ghana Accumulated losses/profits: NPART recovered a total amount of C 19.61 billion, equivalent to 0.33 on every (82-89) Cedi. Sweden Was transfer a one-off process? * In most cases. Securum took . Securum/Retriva: Assets sold: Securum: Transfer of assets was a one time event. Retriva: Transfer of assets was a one time event. over collateral and did not SEK 57 billion or 86.3 of total (91 - 94) Securum/Retriva: Assets transferred to Retriva by Gota Bank, were acquired by Securum, by purchase of restructure loans. assets. Assets remaining on Retriva from the State for SEK 3.8 billion. books: SEK 9 billion or 13.6 of total assets, as of June 1997. Criteria used for loan workout: These assets are presently held Securum/Retriva: All assets were valued on a case by case basis. Cash flow analysis would determine if by Venantius AB. the asset was worth restructuring or liquidating. Exception for equitable treatment in this process: for cases where labor market considerations prevailed. Securum used three different divestment altematives: * Installment plans, with or without concession, depending on customer solvency. * Reconstruction plan, when business in question had a good chance of surviving. * Taking over of collateral. In most cases, taking over collateral proved to be only financially viable altemative. Management of Assets: * Asset enhancement, for example attempts to leave vacant space. Instruments applied (partial debt write off, debt-to-equity swap, change of maturity): Mostly debt to equity swap. Process of asset sale/disposition: When asset value could no longer be significantly enhanced through active management, and Securum was able to obtain a sales price that corresponded to its target value, it sold the asset. Purchaser of assets: Secururn/Retriva: Domestic and foreign (Breakdown NA). Accumulated losses/profits: Policy Research Working Paper Series Contact Title Author Date for paper WPS2265 The Political Economy of Distress Paola Bongini January 2000 R. Vo in East Asian Financial Institutions Stijn Claessens 33722 Giovanni Ferri W,EPS2266 The Impact of Adult Deaths on Martha Ainsworth January 2000 S. 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