## _pdp03

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---

### Introduction and objectives of AMCs
- AMCs facilitate bank restructuring by managing and disposing of nonperforming assets (NPLs) when these reach systemic proportions.
- Primary purposes and rationales:
  - Facilitate resolution of insolvent/nonviable financial institutions.
  - Restructure distressed but viable financial institutions.
  - Support privatization of government-owned or government-intervened banks.
- Managerial rationale: handling bad loans requires skills (real estate specialists, liquidation experts, sectoral insights) distinct from normal banking; separating “good bank” and AMC allows independent profit goals and incentives.
- Operational goals: AMC activities should be guided by profit maximization or loss minimization, accounting for market conditions and funding cost; mixing conflicting social objectives with asset management objectives is not recommended.

### Structural and organizational issues
- Ownership and organizational options:
  - AMCs can be public or private; sellers of assets can be public or private.
  - When large volumes of bad assets must be transferred rapidly, government ownership of an AMC may be preferable to guarantees to private owners.
  - AMC as a subsidiary of a bank: leverages borrower knowledge but risks distracting bank management and may require nonbank professionals for assets like real estate.
  - Public AMCs can be freestanding or part of an existing public agency; they should preferably not be units/subsidiaries of the central bank.
- Number of AMCs:
  - Tradeoffs between a single centralized AMC and multiple decentralized AMCs: economies of scale versus agility and specialization.
  - Factors determining structure: types of assets, magnitude of the problem, market depth, and debtor characteristics.
  - Rationale for centralization increases when market depth is low for particular assets.
- Legal powers:
  - Legal basis must allow clean transfers of title and priority; remove obstacles requiring debtor permission for loan transfers.
  - Consider legal protection for AMC employees executing duties in good faith.
  - When courts are ineffective or reforms too slow, special legal powers may be granted (examples from Malaysia—Danaharta—include: (i) special vesting powers; (ii) appointment of special administrators without court; (iii) ability to readily foreclose), balanced against risks of abuse and weakening due process.

### Box summary — Advantages and disadvantages of a centralized public AMC
- Advantages:
  - Serves as a vehicle for getting NPLs out of troubled banks, based on uniform valuation criteria.
  - Allows government to attach conditions to purchases of NPLs in terms of bank restructuring.
  - Centralizes scarce human resources (domestic and foreign).
  - Centralizes ownership of collateral, providing more leverage over debtors and more effective management.
  - Can better force operational restructuring of troubled banks.
  - Can be given special legal powers to expedite loan recovery and bank restructuring.
- Disadvantages:
  - Management often weaker than in private structures, reducing efficiency and effectiveness.
  - Subject to political pressure.
  - Values of acquired assets may erode faster when outside a banking structure.
  - NPLs and collateral often long-term “parked” in an AMC, not liquidated.
  - If not actively managed, a public AMC could lead to deterioration of credit discipline in the financial system.
  - Operating costs may be higher than private arrangements.
  - Determining transfer prices when dealing with private banks is difficult.

### Governance and incentive issues
- Governance essentials:
  - Independence and transparency are critical, especially for government-owned AMCs.
  - AMC should be insulated from political interference; funding operating expenses from its own balance sheet is recommended.
  - Governance structure: a Board of Directors with a majority of outside independent directors; board responsible for policies on compensation, asset disposition, credit/restructuring, budgets, and reporting.
  - Transparency measures: regular published reports, financial statements prepared under accepted liquidation/fund accounting practices, independent audits.
  - Performance measurement: assets should be accounted properly at transfer; measure performance against “mark-to-market” or estimated recovery value at transfer; if assets transfer at book value, establish provisions immediately so initial shortfall is clear.
- Oversight of private AMCs when government retains exposure:
  - Key components: clear agreements with measurable objectives and delegations of authority; detailed reporting and provision of financial data; government audits and transparency equivalent to a public AMC; delegated staff with authority to act quickly on retained approvals.
- Incentives and staffing:
  - AMCs face incentive problem of being self-liquidating; risk of becoming warehouses of NPLs.
  - Remedies:
    - Incentives for board members (political rewards, public recognition, or financial incentives).
    - Limiting statutory life of the AMC at creation (example: positive contribution to RTC success).
    - Staffing: rely on senior career managers with term appointments for employees tied to expected life of the work.
  - Staff compensation: combine salary and performance-based bonuses; governments may need to pay above civil service levels to attract skills; mitigate risk of premature asset disposals for bonuses via approval procedures and asset-specific goals.
  - Performance-based goals for staff should be aligned with recoveries compared to original estimated recovery value.

### Operational issues
- Commercial orientation and asset selection:
  - Options: buy assets only from banks being resolved and under government control, or also buy from open banks.
  - Potential conflict when a public AMC buys from open banks: fairness versus economizing limited resources; possible compromise—buy some but not all bad assets of assisted banks (example: Sweden).
  - Distinguish better-quality performing loans (transfer to other banks) from impaired assets (suitable for AMC).
  - AMCs should take on assets they can manage more effectively (foreclosed property, loans requiring foreclosure/settlement); loans with restructuring potential or small credits better remain in banks.
  - Example policy: Danaharta applies a minimum threshold of RM 5 million (approximately $1.5 million) to loans it will purchase; all banks eligible, but those with NPLs in excess of 10 percent of assets are strongly encouraged to reduce NPL ratios.
- Pricing and valuation:
  - Transfer at fair market value is crucial to avoid concealing costs of recapitalization and to provide clear goals for AMC management.
  - Valuation methods: probability of recovery, cash flow projections, appraisal of collateral; transfers can occur at an initial price with final price determined later, potentially supplemented by profit-loss sharing arrangements (Danaharta practice).
  - Danaharta case specifics:
    - Purchased impaired loans at an average discount of 55 percent.
    - Banks selling retain a right to receive 80 percent of any recoveries in excess of their acquisition cost realized by the AMC.
    - Banks rejecting Danaharta offers must provision to bring NPL value down to 80 percent of the offer price.
- Funding:
  - Public AMCs must be sufficiently funded but subject to hard budget constraints; operating budget should be separate from funding for asset takeover.
  - Funding often via government bond issues or AMC bond issues backed by government, with losses absorbed by the budget.
  - Coordination with government debt management important when issues are large; AMC bonds should carry characteristics aligned with existing government bonds to avoid market segmentation.
  - Bond maturities should align with legal life of AMC and expected cash flows; consider tax treatment if bonds are tradable and government guaranteed.
  - Examples:
    - KAMCO: tradable bonds paying interest semiannually, issued with government guarantee.
    - Danaharta: five-year maturity zero coupon bonds with central government guarantee; active secondary market.
    - FOBRAPROA (Mexico): funded by 10-year promissory notes that were government-backed but not tradable; interest accrued but not payable until maturity—less liquid and not market based.
- Asset management and disposition:
  - Goal: maximize value of assets considering market conditions and AMC funding cost.
  - Ambiguity in “recovery value”: maximize market value versus maximize book value—policy must clarify objective.
  - U.S. statutory goal in savings and loan crisis: maximize net present value of assets under RTC and FDIC management.
  - Sweden example: for each asset calculate required yearly price increase to offset holding costs; if unrealistic, sell immediately—facilitated rapid sales and shortened AMC lifespan.
  - Speed of disposition varies by country:
    - Spain and United States disposed assets relatively rapidly.
    - Securum (Sweden) disposed of 98 percent of its assets in the five years of its existence.
    - IBRA (Indonesia) faced slow dispositions due to macroeconomic fragility and scale of assets but closed down operations per sunset provision, transferring work to ministry of finance.

### Conclusions and policy recommendations
- AMCs are useful crisis-management vehicles to remove NPLs quickly so banking systems can resume normal functions, including payment services.
- Managerial purpose: banks often lack expertise to manage impaired assets; AMCs provide specialized commercial skills.
- No single AMC model fits all countries or times; optimal strategy varies, but common success factors include:
  - supporting legal and regulatory environment;
  - strong leadership;
  - operational independence;
  - appropriately structured incentives;
  - commercial orientation.
- AMCs should have a strict profit-maximizing goal and act as normal market participants; this should guide valuation, funding strategy, and disposition speed.
- Public evaluation and government oversight require proper accounting at transfer and for cash flows; performance should be measured against “mark-to-market” or estimated recovery value at time of transfer.

*Source: _pdp03 - 1. Advantages and Disadvantages of a Centralized Public AMC; REFERENCES*

### References..............................................................................................................

### _pdp03 - References..............................................................................................................

### Text Table
- Entry: "1.  Considerations for Decentralized Asset Management  ................................................10"

### References Listing
- Page indicator: "References................................................................................................................................28"

### Boxes and Other Elements
- Mentioned element: "Box"

*Source: _pdp03 - References..............................................................................................................*

### 1. Advantages and Disadvantages of a Centralized Public AMC......................................9

### _pdp03 - 1. Advantages and Disadvantages of a Centralized Public AMC......................................9

### Introduction and objectives of AMCs
- AMCs facilitate bank restructuring by managing and disposing of nonperforming assets (NPLs) when these reach systemic proportions.
- Primary purposes and rationales:
  - Facilitate resolution of insolvent/nonviable financial institutions.
  - Restructure distressed but viable financial institutions.
  - Support privatization of government-owned or government-intervened banks.
- Managerial rationale: handling bad loans requires skills (real estate specialists, liquidation experts, sectoral insights) distinct from normal banking; separating “good bank” and AMC allows independent profit goals and incentives.
- Operational goals: AMC activities should be guided by profit maximization or loss minimization, accounting for market conditions and funding cost; mixing conflicting social objectives with asset management objectives is not recommended.

### Structural and organizational issues
- Ownership options:
  - AMCs can be public or private; sellers of assets can be public or private.
  - When large volumes of bad assets must be transferred rapidly, government ownership of an AMC may be preferable to guarantees to private owners.
  - AMC as a subsidiary of a bank: leverages borrower knowledge but risks distracting bank management and may require nonbank professionals for assets like real estate.
  - Public AMCs can be freestanding or part of an existing public agency; they should preferably not be units/subsidiaries of the central bank.
- Number of AMCs:
  - Tradeoffs between a single centralized AMC and multiple decentralized AMCs: economies of scale versus agility and specialization.
  - Factors determining structure: types of assets, magnitude of the problem, market depth, and debtor characteristics.
  - Rationale for centralization increases when market depth is low for particular assets.
- Legal powers:
  - Legal basis must allow clean transfers of title and priority; remove obstacles requiring debtor permission for loan transfers.
  - Consider legal protection for AMC employees executing duties in good faith.
  - When courts are ineffective or reforms too slow, special legal powers may be granted (examples from Malaysia—Danaharta—include: (i) special vesting powers; (ii) appointment of special administrators without court; (iii) ability to readily foreclose), balanced against risks of abuse and weakening due process.

### Advantages and disadvantages of a centralized public AMC (Box summary)
- Advantages:
  - Serves as a vehicle for getting NPLs out of troubled banks, based on uniform valuation criteria.
  - Allows government to attach conditions to purchases of NPLs in terms of bank restructuring.
  - Centralizes scarce human resources (domestic and foreign).
  - Centralizes ownership of collateral, providing more leverage over debtors and more effective management.
  - Can better force operational restructuring of troubled banks.
  - Can be given special legal powers to expedite loan recovery and bank restructuring.
- Disadvantages:
  - Management often weaker than in private structures, reducing efficiency and effectiveness.
  - Subject to political pressure.
  - Values of acquired assets may erode faster when outside a banking structure.
  - NPLs and collateral often long-term “parked” in an AMC, not liquidated.
  - If not actively managed, a public AMC could lead to deterioration of credit discipline in the financial system.
  - Operating costs may be higher than private arrangements.
  - Determining transfer prices when dealing with private banks is difficult.

### Governance and incentive issues
- Governance essentials:
  - Independence and transparency are critical, especially for government-owned AMCs.
  - AMC should be insulated from political interference; funding operating expenses from its own balance sheet is recommended.
  - Governance structure: a Board of Directors with a majority of outside independent directors; board responsible for policies on compensation, asset disposition, credit/restructuring, budgets, and reporting.
  - Transparency measures: regular published reports, financial statements prepared under accepted liquidation/fund accounting practices, independent audits.
  - Performance measurement: assets should be accounted properly at transfer; measure performance against “mark-to-market” or estimated recovery value at transfer; if assets transfer at book value, establish provisions immediately so initial shortfall is clear.
- Oversight of private AMCs when government retains exposure:
  - Key components: clear agreements with measurable objectives and delegations of authority; detailed reporting and provision of financial data; government audits and transparency equivalent to a public AMC; delegated staff with authority to act quickly on retained approvals.
- Incentives:
  - AMCs face incentive problem of being self-liquidating; risk of becoming warehouses of NPLs.
  - Remedies:
    - Incentives for board members (political rewards, public recognition, or financial incentives).
    - Limiting statutory life of the AMC at creation (example: positive contribution to RTC success).
    - Staffing: rely on senior career managers with term appointments for employees tied to expected life of the work.
  - Staff compensation: combine salary and performance-based bonuses; governments may need to pay above civil service levels to attract skills; mitigate risk of premature asset disposals for bonuses via approval procedures and asset-specific goals.
  - Performance-based goals for staff should be aligned with recoveries compared to original estimated recovery value.

### Operational issues
- Commercial orientation:
  - Selection of assets:
    - Options: buy assets only from banks being resolved and under government control, or also buy from open banks.
    - Potential conflict when a public AMC buys from open banks: fairness versus economizing limited resources; possible compromise—buy some but not all bad assets of assisted banks (example: Sweden).
    - Distinguish better-quality performing loans (transfer to other banks) from impaired assets (suitable for AMC).
    - AMCs should take on assets they can manage more effectively (foreclosed property, loans requiring foreclosure/settlement); loans with restructuring potential or small credits better remain in banks.
    - Example policy: Danaharta applies a minimum threshold of RM 5 million (approximately $1.5 million) to loans it will purchase; all banks eligible, but those with NPLs in excess of 10 percent of assets are strongly encouraged to reduce NPL ratios.
- Pricing:
  - Transfer at fair market value is crucial to avoid concealing costs of recapitalization and to provide clear goals for AMC management.
  - Valuation methods: probability of recovery, cash flow projections, appraisal of collateral; transfers can occur at an initial price with final price determined later, potentially supplemented by profit-loss sharing arrangements (Danaharta practice).
  - Danaharta case: purchased impaired loans at an average discount of 55 percent; banks selling retain a right to receive 80 percent of any recoveries in excess of their acquisition cost realized by the AMC; banks rejecting Danaharta offers must provision to bring NPL value down to 80 percent of the offer price.
- Funding:
  - Public AMCs must be sufficiently funded but subject to hard budget constraints; operating budget should be separate from funding for asset takeover.
  - Funding often via government bond issues or AMC bond issues backed by government, with losses absorbed by the budget.
  - Coordination with government debt management important when issues are large; AMC bonds should carry characteristics aligned with existing government bonds to avoid market segmentation.
  - Bond maturities should align with legal life of AMC and expected cash flows; consider tax treatment if bonds are tradable and government guaranteed.
  - Examples:
    - KAMCO: tradable bonds paying interest semiannually, issued with government guarantee.
    - Danaharta: five-year maturity zero coupon bonds with central government guarantee; active secondary market.
    - FOBRAPROA (Mexico): funded by 10-year promissory notes that were government-backed but not tradable; interest accrued but not payable until maturity—less liquid and not market based.
- Asset management and disposition:
  - Goal: maximize value of assets considering market conditions and AMC funding cost.
  - Ambiguity in “recovery value”: maximize market value versus maximize book value—policy must clarify objective.
  - U.S. statutory goal in savings and loan crisis: maximize net present value of assets under RTC and FDIC management.
  - Sweden example: for each asset calculate required yearly price increase to offset holding costs; if unrealistic, sell immediately—facilitated rapid sales and shortened AMC lifespan.
  - Speed of disposition varies by country: Spain and United States disposed assets relatively rapidly; Securum (Sweden) disposed of 98 percent of its assets in the five years of its existence; IBRA (Indonesia) faced slow dispositions due to macroeconomic fragility and scale of assets but closed down operations per sunset provision, transferring work to ministry of finance.

### Conclusions and policy recommendations (paper’s summary arguments)
- AMCs are useful crisis-management vehicles to remove NPLs quickly so banking systems can resume normal functions, including payment services.
- Managerial purpose: banks often lack expertise to manage impaired assets; AMCs provide specialized commercial skills.
- No single AMC model fits all countries or times; optimal strategy varies, but common success factors include:
  - supporting legal and regulatory environment;
  - strong leadership;
  - operational independence;
  - appropriately structured incentives;
  - commercial orientation.
- AMCs should have a strict profit-maximizing goal and act as normal market participants; this should guide valuation, funding strategy, and disposition speed.
- Public evaluation and government oversight require proper accounting at transfer and for cash flows; performance should be measured against “mark-to-market” or estimated recovery value at time of transfer.

*Source: _pdp03 - 1. Advantages and Disadvantages of a Centralized Public AMC......................................9*

### REFERENCES

### _pdp03 - REFERENCES

### Cited works
- Adams, Charles, Robert E. Litan, and Michael Pomerleano, eds., 2000, Managing Financial and Corporate Distress: Lessons from Asia, (Washington: Brookings Institution Press).
- Enoch, Charles, Gillian Garcia, and V. Sundararajan, 1999, “Recapitalizing Banks with Public Funds: Selected Issues,” IMF Working Paper 99/139, (Washington: International Monetary Fund)
- Lindgren, Carl-Johan and others, 1999, Financial Sector Crisis and Restructuring: Lessons from Asia (Washington: International Monetary Fund)
- Ingves, Stefan, and Goran Lind, 1997, “Loan Loss Recoveries and Debt Resolution Agencies: The Swedish Experiences,” in Charles Enoch and John Green (eds.), Banking Soundness and Monetary Policy (Washington: International Monetary Fund)
- Ingves, Stefan, and Dong He, 2000, “Facilitating Bank and Corporate Restructuring: The Role of Government,” in Adams and others.
- Klingebiel, Daniela, 2000, “The Use of Asset Management Companies in the Resolution of Banking Crises: Cross-Country Experience,” World Bank Policy Research Paper No. 2284 (Washington: World Bank)
- Woo, David, 2000, “Two Approaches to Resolving Nonperforming Assets During Financial Crises,” IMF Working Paper 00/33 (Washington: International Monetary Fund)

*Source: _pdp03 - REFERENCES*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/pdp/2004/_pdp03.pdf_