Brussels, 25/02/2009 (Agence Europe) - On Wednesday 25 February, the European Commission adopted a communication on the treatment of impaired assets, seeking to ensure consistency in the ways member states help banks get rid of their toxic assets. Far from recommending a single approach for all, the communication established, with more or less flexibility, guidelines for the conditions to be met to ensure a level playing field and compliance with state aid rules. Each member state is free, then, in the light of its own specific situation and those of the establishments concerned, to choose how the mechanism for purchasing or guaranteeing impaired assets. This term is used to cover a wider range than just toxic assets, traditionally linked to assets backed securities and derived financial products. “Impaired assets” includes others, such as non-securitized loans to companies, or to the construction industry, etc.
Among the mechanisms available, the Commission says, member states can decide to set up one or more “bad banks” to buy back the assets concerned (preceded, if appropriate, by the nationalisation of the banks before separating the impaired assets from the others) or putting in place a guarantee system to protect banks against losses resulting from their impaired assets. Whether purchase of assets or guarantee of assets, each instrument needs a clear framework to assess the value (and, hence, the price) of the bad debts and so avoid competition distortions. It sets out a number of principles to restore the stability of the banking sector and the proper working of the credit market, while limiting the impact of these operations on public finances. The principles are: - there has to be full transparency and disclosure of impairments before any government intervention (any asset relief measure must be based on clear identification of the magnitude of the problem for the bank, its intrinsic solvency prior to the support and its prospects for return to viability, the Commission says); - assets eligible for relief must correspond to a basket of assets defined earlier in a coordinated manner (a balance must be found between the objective of immediate financial stability and the need to ensure the return to normal market functioning over the medium term, the Commission states); - the value attributed to impaired assets must abide by a general methodology established at Community level and must be coordinated ex ante by the Commission. Evaluation should take account not of the market value but rather the real economic value in the long term based on cautious and realistic predictions. Given the complexity of the task, “uniform valuation haircuts” could be envisaged; - valuations should also be validated by the Commission in accordance with state aid procedures; - there must be adequate burden sharing between shareholders, creditors and the state (for the Commission, the general principle must be that banks must shoulder maximum losses linked to impaired assets); - there must be adequate state remuneration; - incentives must be aligned for banks to participate in asset relief with public policy objectives, so that impaired asset relief programmes should have an enrolment window limited to six months from the launch of the scheme by the government, except in exceptional circumstances. Appropriate mechanisms may need o be devised to ensure banks most in need of asset relief participate in the government measure and such mechanisms could include mandatory participation in the programme. Restrictions on dividend policy and caps on executive remuneration must be considered; - the management of assets benefiting from treatment should meet conditions to prevent all conflict of interest; - appropriate restructuring measures are necessary to remedy competition distortion, following a case-by-case approach, and taking account of the total aid received under recapitalisation and re-purchase or guarantee of impaired assets.
Whatever approach is adopted by member states, the Commission will assess the mechanism set in place according to uniform criteria. Its acceptance of measures taken will be valid during six months and subject to presentation of details of evaluation of impaired assets, an analysis of the viability of the restructuring plan for each beneficiary institution within three months following its accession to the programme. Presenting this communication to the press, with his colleagues responsible for competition (Neelie Kroes) and the internal market (Charlie McCreevy), the commissioner for economic and monetary affairs, Joaquin Almunia, hoped the EU finance ministers would reach a political agreement on this dossier during the Ecofin Council.
The communication is available in English on the DG Competition site at the following address: http://www.ec.europa.eu/competition/state_aid/legislation/impaired_assets.pdf . (A.B./transl.jl)