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Policy Contribution

Carving out legacy assets: a successful tool for bank restructuring?

Separating ‘legacy assets’ from banks’ core business is central to the rehabilitation of Europe’s banking system. How can Europe progress in its ongoing effort to rid the financial system of legacy assets, and equip it with renewed growth?

By: Date: March 21, 2017 Topic: European Parliament

This material was originally published in a paper provided at the request of the Committee on Economic and Monetary Affairs of the European Parliament and commissioned by the Directorate-General for Internal Policies of the Union and supervised by its Economic Governance Support Unit (EGOV). The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the official position of the European Parliament. The original paper is available on the European Parliament’s webpage (here). © European Union, 2017

The separation of so-called legacy assets from the remaining healthy business of a bank has become a central concern in risk management and supervision. In the European Union, non-performing loans amount to over €1 trillion and an additional stock of non-core assets that is at least as large is also being offered in the secondary market.

Banks have employed various organisational models to separate these assets from their core business. At one extreme, banks have tasked specialist staff to focus on workout or selective sales, while the bulk of these assets remain on the same balance sheets. To do this, appropriate incentives have to be set for bank staff, and a number of failures that are inherent to the market for loan sales have to be addressed.

At the other extreme, in situations of serious distress, countries set up external asset management companies (AMCs), either specific to an individual bank, or working across the industry for specific types of loans. As the transfer to another entity crystallises the value loss of legacy assets, this option requires a capital injection and restructuring of the bank’s balance sheet.

Past EU experience has demonstrated the effectiveness of AMCs, in particular when they work with a large part of the banking sector and are focused on specific loan types. Asset separation in conjunction with an asset management company can also be an effective tool for bank resolution, but the difficulties inherent in setting up an AMC and achieving a track record in restructuring should not be underestimated. Countries are well advised to prepare the legal basis for such entities.

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Blog Post

The impact of the crisis on smaller companies and new mechanisms for non-performing loans

The ongoing recession will result in a fresh surge in non-performing loans (NPLs) once payment holidays and moratoria end later this year. NPL investors played a valuable role in tackling the stock of problem loans from the last crisis, but in the aftermath of the current recession more complex financial restructuring will be needed. Governments should facilitate the refinancing of distressed but viable companies, possibly through a special regime for SMEs.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: July 22, 2020
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Blog Post

Boosting the resilience of Europe’s financial system in the coronavirus crisis

Europe has a heavily bank-based financial structure, but bank-based financial structures are associated with higher systemic risk than market-based financial structures. The higher level of systemic risk in Europe suggests caution when pursuing policies that stimulate risk taking and debt creation by banks, especially in the wake of COVID-19. Priority should be given to financial diversification and equity finance.

By: Joost Bats, Aerdt Houben and Dirk Schoenmaker Topic: Finance & Financial Regulation Date: July 17, 2020
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Past Event

Past Event

CANCELLED: How adequate is the European toolbox to deal with financial stability risks in a low rate environment?

Bruegel is delighted to welcome the governor of the Central Bank of Ireland, Gabriel Makhlouf. He will deliver a keynote address about how adequate the European toolbox is to tackle financial stability risks in a low rate environment. Following his speech, a panel of experts will further discuss the topic.

Speakers: Gabriel Makhlouf, Guntram B. Wolff and Agnès Bénassy-Quéré Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 31, 2020
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Podcast

Podcast

Banks and loan losses in the pandemic turmoil

The current pandemic is shaking the financial system. How can banks react ? Is a consolidation of the financial system in Europe needed in order to respond to this crisis ? Will our economies suffer from this pandemic as much as they did in 2008 ? This week, Giuseppe Porcaro is joined live by Guntram Wolff and Nicolas Véron to discuss banks and loan losses in the pandemic turmoil.

By: The Sound of Economics Topic: Finance & Financial Regulation Date: March 25, 2020
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Past Event

Past Event

The Sound of Economics Live: Banks and Loan Losses in the Pandemic Turmoil

At this online event we will record an episode of the Sound of Economics, Bruegel's podcast series. In this episode, we discuss the implications of the coronavirus crisis on financial stability and credit availability.

Speakers: Giuseppe Porcaro, Nicolas Véron and Guntram B. Wolff Topic: Finance & Financial Regulation Date: March 25, 2020
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Blog Post

Banks in pandemic turmoil

The banking system is critical to society and requires attention and support. In doing so, however, tough love is preferable to complacency.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: March 24, 2020
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Opinion

The European coronavirus response must be a solution, not more stigma

Lagarde needs a different bazooka in responding to a natural disaster like COVID-19.

By: Rebecca Christie Topic: European Macroeconomics & Governance Date: March 18, 2020
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Past Event

Past Event

CANCELLED: The new age of old age? Laying out the Non-Financial Defined Contribution scheme

Are Non-Financial Defined Contribution (NDC) schemes the best approach to reforming pension systems?

Speakers: Robert Holzmann and Maria Demertzis Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 18, 2020
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External Publication

Analysis of developments in EU capital flows in the global context

This report presents an overview of the recent trends of capital flows, focused especially on the past year. It provides a detailed analysis at the global level and at the European Union level.

By: Grégory Claeys, Maria Demertzis, Marta Domínguez-Jiménez, Konstantinos Efstathiou and Tanja Linta Topic: European Macroeconomics & Governance Date: March 16, 2020
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Blog Post

What is fuelling the Dutch house price boom?

Housing prices have been rising fast in the West of the Netherlands in the last five years. However, mortgages outstanding have remained flat, raising the question of what has driven the increase. Evidence suggests that housing supply constraints have, this time around, played a role in pushing the house prices up.

By: Sybrand Brekelmans Topic: European Macroeconomics & Governance Date: February 19, 2020
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Blog Post

Recent euro-area house price increases are dissimilar to earlier housing booms

Current housing markets relative to those pre-crisis seem to be far less driven by mortgage credit, and the size of the construction sector has not increased. This is possibly good news for financial stability because an eventual house price correction would transmit less into mortgage defaults and corrections in economic activity.

By: Zsolt Darvas, Marta Domínguez-Jiménez and Guntram B. Wolff Topic: Finance & Financial Regulation Date: February 17, 2020
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Policy Contribution

European Parliament

From climate change to cyber attacks: Incipient financial-stability risks for the euro area

The European Central Bank’s November 2019 Financial Stability Review highlighted the risks to growth in an environment of global uncertainty. On the whole, the ECB report is comprehensive and covers the main risks to euro-area financial stability, we highlight issues that deserve more attention.

By: Zsolt Darvas, Marta Domínguez-Jiménez and Guntram B. Wolff Topic: European Macroeconomics & Governance, European Parliament, Finance & Financial Regulation, Testimonies Date: February 6, 2020
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