25 February 2009

Commission provides guidance for impaired assets in the EU banking sector

The Communication provides a common European approach and outlines various methods of dealing with impaired assets, notably through asset purchase - including bad bank scenarios - or asset insurance schemes.

The Commission provided a common European approach on the treatment of asset relief measures by Member States.

The Communication outlines various methods of dealing with impaired assets, notably through asset purchase - including bad bank scenarios - or asset insurance schemes. It explains the budgetary and regulatory implications of asset relief measures and presents details concerning the application of the State aid rules to such measures.

 

In particular, the guidance provides methodologies concerning the valuation of the impaired assets, the necessary remuneration of the State for the asset relief and the procedural steps that will be followed as well as the criteria that will be used to evaluate the State aid given to the banks as a result.

 

The guidance for the application of the State aid rules is based on a number of principles:

Ø       full transparency and disclosure of impairments, which has to be done prior to government intervention;

Ø       co-ordinated approach to the identification of assets eligible for asset relief measures through development of eligible categories of assets ("baskets");

Ø       co-ordinated approach to valuation of assets ex-ante, based on common principles such as valuation based on real economic value (rather than market value), implemented by independent experts and certified by bank supervisors,

Ø       validation by the Commission of the valuation of the assets, in the framework of the State aid procedures on the basis of uniform assessment criteria;

Ø       adequate burden-sharing of the costs related to impaired asset between the shareholders, the creditors and the State,

Ø       adequate remuneration for the State, at least equivalent to the remuneration of State capital

Ø       coverage of the losses incurred from the valuation of the assets at real-economic-value by the bank benefiting from the scheme

Ø       aligning incentives for banks to participate in asset relief with public policy objectives, through an enrolment window limited to six months during which the banks would be able to come forward with impaired assets;

Ø       management of assets subject to relief so as to avoid conflicts of interests;

Ø       appropriate restructuring including measures to remedy competition distortion, following a case by case assessment and taking into account the total aid received through recapitalisation, guarantees or asset relief, with a view to the long-term viability and normal functioning of the European banking industry.

 

The design of the asset relief scheme, be it asset purchase, insurance, swap, guarantee or hybrid models, is the responsibility of the Member State. Their treatment from the State aid point of view will however be subject to uniform assessment criteria, which should maintain a level playing field.

 

Press release

Communication

 

© European Commission