Carving Out Legacy Assets: A Successful Tool for Bank Restructuring?

15-03-2017

This paper drafted under supervision of the Economic Governance Support Unit considers a number of issues related to the restructuring of troubled banks in the EU. First, we provide an overview of how legacy assets have been dealt in a number of countries (drawing in particular upon the experience in Japan, the USA, Sweden and Spain), which support the case for a centralized solution in the presence of a generalized banking crisis. Second, we shed light on the need to differentiate between systemic and non-systemic events by examining the relevant literature on the credit channel. Third, we elaborate the theoretical argument on the need for a systematic centralised approach at the EU level to deal with legacy assets in bank restructuring to maintain fair recovery rates. Finally, we provide a preliminary assessment of the business models, risk, response to regulation and performance of 38 state aided banks via recapitalisation measures and explicit restructuring requirements with an emphasis on APS-AMC arrangements using available data between 2005 and 2015. The indicators show that these state aided banks are returning progressively to soundness and struggling to regain performance levels of the pre-crisis period, which is a generalised problem of the European banking sector.

This paper drafted under supervision of the Economic Governance Support Unit considers a number of issues related to the restructuring of troubled banks in the EU. First, we provide an overview of how legacy assets have been dealt in a number of countries (drawing in particular upon the experience in Japan, the USA, Sweden and Spain), which support the case for a centralized solution in the presence of a generalized banking crisis. Second, we shed light on the need to differentiate between systemic and non-systemic events by examining the relevant literature on the credit channel. Third, we elaborate the theoretical argument on the need for a systematic centralised approach at the EU level to deal with legacy assets in bank restructuring to maintain fair recovery rates. Finally, we provide a preliminary assessment of the business models, risk, response to regulation and performance of 38 state aided banks via recapitalisation measures and explicit restructuring requirements with an emphasis on APS-AMC arrangements using available data between 2005 and 2015. The indicators show that these state aided banks are returning progressively to soundness and struggling to regain performance levels of the pre-crisis period, which is a generalised problem of the European banking sector.