Technical Notes and Manuals

The Case for (and Against) Asset Management Companies in Banking Crises

Author/Editor:

Miguel A Otero Fernandez ; Jaime Ponce ; Marc C Dobler ; Tomoaki Hayashi

Publication Date:

July 9, 2024

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:

This technical note explores the advantages and disadvantages of establishing state-sponsored centralized asset management companies (AMCs) to address high levels of bank asset distress during financial crises. AMCs may offer potential benefits like mitigating downward price spirals or achieving efficiency gains by consolidating creditor claims and scarce expertise. However, significant risks and costs warrant careful consideration. These include extreme uncertainties in asset valuation and substantial operational and financial risks. Past international experiences highlight the dangers of underestimating these risks, potentially turning the AMC into a mechanism for deferring losses to taxpayers, rather than minimizing them, and ultimately increasing long-term public costs and moral hazard. This technical note emphasizes these trade-offs and discusses crucial design elements for effective AMCs: a clear mandate, transfer pricing that prudently reflects asset values and disposal costs, strong governance with independent management, and efficient operational processes promoting transparency and accountability.

Series:

Technical Notes and Manuals No. 2024/004

Subject:

Asset and liability management Asset management Asset management companies Asset valuation Distressed assets Expenditure Financial institutions Financial sector policy and analysis Financial statements Government asset management Loans Nonperforming loans Public financial management (PFM) Revenue administration Taxes Transfer pricing

Frequency:

occasional