Bad banks in the EU: the impact of Eurostat rules

 At least 12 European Union member states used publicly created asset management companies (AMCs), otherwise known as a ‘badbanks’ to respond to

Publishing date: 16 December 2014
Authors: Mark Hallerberg Christopher Gandrud

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• At least 12 European Union member states used publicly created asset management companies (AMCs), otherwise known as a ‘badbanks’ to respond to the recent financial crisis. This tool remains an option for future bank resolutions under the EU Bank Recovery and Resolution Directive.

• We assess the design of AMCs in the recent crisis and why their form has changed. Through its role as definer of statistical concepts used under the Stability and Growth Pact, Eurostat has affected the design of AMCs. Increasingly stringent rulings on whether AMCs count as debt have pushed member states to create similar types of AMCs, namely those with majority private-sector ownership.

• We argue that privately owned AMCs act differently to publicly owned ones. In particular, private AMCs usually impose larger haircuts on the price they pay for the assets they acquire. This haspositive benefits for how profitable the AMC will be and how much it will help in avoiding the creation of zombie banks and zombie badbanks.

• There are important caveats. The effect of Eurostat’s accounting rules on decision-making is stronger in countries with more strained budgets. Also, when the public owns a failed bank, Eurostat rulesare likely to have little impact on AMC ownership decisions. Governments tend to use publicly owned bad banks to resolve publicly owned failed banks. This is because it is difficult to compel private sector involvement in these situations

About the authors

Mark Hallerberg

Mark Hallerberg was a Non-Resident Fellow at Bruegel from September 2013 to 2022. He is a Professor of Public Management and Political Economy at the Hertie School of Governance and is Director of Hertie's Fiscal Governance Centre.

He is the author of one book, co-author of a second, and co-editor of a third. He has published over twenty-five articles and book chapters on fiscal governance, tax competition and exchange rate choice.

He has previously held professorships at Emory University, the University of Pittsburgh, and the Georgia Institute of Technology. He has done consulting work for the Dutch and German Ministries of Finance, Ernst and Young Poland, the European Central Bank, the German Development Corporation (GIZ), the Inter-American Development Bank, International Monetary Fund, and the World Bank.
Christopher Gandrud

Christopher Gandrud is a Lecturer in Quantitative International Political Economy at City University London and Post-Doctoral Researcher at the Fiscal Governance Centre, Hertie School of Governance. His research focuses on the international political economy of public financial and monetary institutions, as well as applied social science statistics and software development. His work has been published in peer reviewed journals including the Journal of Common Market Studies, Journal of Peace Research, Research and Politics, Review of International Political Economy, Political Science Research and Methods, Journal of Statistical Software, and International Political Science Review. He has been a Lecturer in International Relations at Yonsei University and a Fellow in Government at the London School of Economics where in 2012 he completed a PhD in quantitative political science.