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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: and Date: March 17, 2017 Topic: Banking and capital markets

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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Macroeconomic and financial stability in changing times: conversation with Andrew Bailey

Guntram Wolff will be joined in conversation by Andrew Bailey, Governor of the Bank of England.

Speakers: Andrew Bailey and Guntram B. Wolff Topic: Macroeconomic policy Date: March 28, 2022
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War in Ukraine: implications for the global financial system and central banks

A special episode of the Sound of Economics Live on the global financial system and central banks in the wake of sanctions imposed on Russia.

By: The Sound of Economics Topic: Banking and capital markets Date: March 2, 2022
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Past Event

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War in Ukraine: implications for the global financial system and central banks

A special episode of the Sound of Economics Live on the global financial system and central banks in the wake of sanctions imposed on Russia.

Speakers: Silvia Merler, Giuseppe Porcaro and Nicolas Véron Topic: Banking and capital markets Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 2, 2022
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European governanceInclusive growth

12 Charts for 21

A selection of charts from Bruegel’s weekly newsletter, analysis of the year and what it meant for the economy in Europe and the world.

By: Hèctor Badenes, Henry Naylor, Giuseppe Porcaro and Yuyun Zhan Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: December 21, 2021
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European Parliament

Don't let up - The EU needs to maintain high standards for its banking sector as the European economy emerges from the COVID-19 pandemic

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Rebecca Christie and Monika Grzegorczyk Topic: Banking and capital markets, European Parliament Date: October 21, 2021
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What is the link between biodiversity loss and financial instability?

Biodiversity loss impacts financial stability. How big is the risk of biodiversity loss for financial institutions?

Speakers: Sylvie Goulard, Romain Svartzman, Guntram B. Wolff and Michael Wilkins Topic: Banking and capital markets Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 5, 2021
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European Parliament

What Are the Effects of the ECB’s Negative Interest Rate Policy?

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By: Grégory Claeys Topic: Banking and capital markets, European Parliament, Testimonies Date: June 9, 2021
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Urgent reform of the EU resolution framework is needed

In this blog, the authors argue that two aspects of the European resolution framework are particularly in need of reform – the bail-in regime and the resolution mechanism for cross-border banks – and propose a reform of both.

By: Mathias Dewatripont, Lucrezia Reichlin and André Sapir Topic: Banking and capital markets, European governance, Macroeconomic policy Date: April 16, 2021
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By: Julia Anderson, David Bholat, Mohammed Gharbawi and Oliver Thew Topic: Banking and capital markets Date: April 15, 2021
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Topic: Macroeconomic policy Date: April 1, 2021
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Speakers: Maria Demertzis, Fernando Fernández, Fiona Maharg-Bravo, Antonio Roldán and Jorge Yzaguirre Topic: Macroeconomic policy Date: March 12, 2021
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Disruption or transformation: the impact of a digital euro on the financial system

How would a digital Euro impact the financial system?

Speakers: Fabio Panetta and Guntram B. Wolff Topic: Banking and capital markets, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 10, 2021
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