From Fragmentation to Financial Integration in Europe
Chapter

Chapter 7. Progress with Bank Resolution and Restructuring in the European Union

Author(s):
Charles Enoch, Luc Everaert, Thierry Tressel, and Jianping Zhou
Published Date:
December 2013
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Author(s)
Luc Everaert, Heiko Hesse and Nadege Jassaud 

Restructuring of the banking system in the European Union (EU) is under way, but further progress is necessary, and the planned asset quality review provides a good opportunity. The level of Tier 1 capital ratios of EU banks has been substantially increased, thanks to government backstops and the recapitalization exercise coordinated by the European Banking Authority (EBA).1 But systemwide, capital ratios have been met partly by deleveraging or recalibrations of the risk weights on activities. Consolidation in the banking sector has been slow, with banks rarely merged or closed.2 Nonperforming loans (NPLs) are building up in banks’ balance sheets, and dependence on central bank liquidity remains high, especially for banks in peripheral countries. Despite the EBA recapitalization exercise having led to €200 billion of new capital or reduction of capital needs by European banks, fresh capital is difficult to attract in an environment where prospects for profitability are uncertain.

To expedite bank restructuring, it will be essential to adjust policies along several dimensions (see part II of this book for details). As is being coordinated by the EU resolution directive, bank resolution tools need to be strengthened to give national authorities all tools necessary to find the least-cost solution to bank restructuring and resolution. Restructuring of NPLs should be facilitated. The legal framework should be adapted to remove obstacles to restructuring and to allow maximum asset recovery. In several EU countries, such as Italy, Greece, and in Eastern Europe, bankruptcy reforms lag behind in that, for instance, current practice does not allow the seizure of collateral in a reasonable timeframe. Banks should also manage more actively their NPLs, facilitating the expansion of a market for distressed assets. Disclosure should be significantly enhanced and harmonized by the EBA to restore market confidence. In particular, interpretable metrics regarding the quality of banks’ assets, in terms of NPLs, collateral, probability of defaults, and loan recovery rates, are key for assessing the strength of banks and restoring confidence in the banking system.

Before the onset of the crisis, relatively favorable conditions—and, in some economies, asset price and credit bubbles—masked underlying vulnerabilities. Many financial systems in Europe were bank-dominated, complex, and very large in proportion to domestic gross domestic product (GDP). Global assets of the five largest banks were typically more than 300 percent of their home country’s GDP (Figure 7.1).3 Credit and asset price bubbles (Reinhart and Rogoff, 2009; Laeven and Valencia, 2008) built up in several jurisdictions, with sharp increases in leverage for households, also reflected in many countries in a substantial increase in house prices. While risks were building up, the overall resilience of banks improved little. From 2000 to 2007, solvency ratios increased by only 0.2 percent.4 Return on equity was high, about 17 percent in 2007 for European banks. Leverage of many large financial institutions also increased, reflecting a reliance on short-term wholesale funding that was not generally considered a concern.

Figure 7.1Assets of EU and U.S. Banking Groups

(2011, in percent of GDP)

Sources: Total assets data from SNL Financial; GDP data from Eurostat, EU Commission.

Direct Support, Recapitalization, and Resolution

The initial response to the crisis consisted of unprecedented broad public support for the financial system out of concern to safeguard financial stability (see Chapter 5 for details). It took the form of guarantees of different elements of the liability side of the banking system, direct government recapitalization, liquidity provision by central banks, and forbearance by supervisors. While these interventions protected against tail risks and provided time to take the necessary adjustment measures, they also had the potential to contribute to delays in restructuring.

To promote restructuring of banks receiving public assistance, direct government support measures were normally complemented by action to restructure the affected banks, in part thanks to EU rules on state aid. According to the Directorate-General for Competition (DG COMP), 10–15 percent of the EU banking system is now under the State Aid framework and undergoing some forced restructuring. Based on a sample of 30 EU large institutions, banks under EU State Aid rules have been (in the process of) deleveraging, with reductions of up to 19 percent of their total assets, according to Morgan Stanley research, while other banks that did not fall under DG COMP state rules deleveraged much less (Figure 7.2). Indeed, the state aid framework does not include proactive intervention in banks, but is applied only once banks receive aid. For those who did not, restructuring had to rely on national measures or private initiatives.

Figure 7.2Deleveraging/Restructuring Plans1

(In percent of total assets)

Source: Morgan Stanley.

1 Banks under formal EU State Aid program as of September 2012.

Competition and state aid policy has served de facto as the main coordinating mechanism in bank restructuring during the crisis, as it is the only binding EU framework available for this purpose.5 DG COMP has the exclusive mandate and power to ensure that state aid is compatible with the Treaty on the Functioning of the EU, and that state aid provision is accepted in exchange for strict conditionality. Compensatory measures required by DG COMP have included divestments, penalty interest rates, management removals, dividend suspensions, and burden-sharing (shareholder dilutions and bail-in of subordinated debt). According to DG Comp, 60 EU banks—accounting for 10–15 percent of the EU banking assets—underwent a deep restructuring. Under the state aid regime, 20 banks were resolved.

Direct government support to banks went in parallel with supervisory actions on banks to recapitalize. Led by the EBA, stress testing and recapitalization exercises resulted in banks increasing the quantity and quality of their capital. After the 2010 Committee of European Banking Supervisors and 2011 EBA EU-wide stress tests,6 the EBA conducted a recapitalization exercise.7 Capital plans submitted by banks have led to €200 billion of new capital or reduction of capital needs, for an aggregate capital shortfall of €115 billion, at end-June 2012. Tier 1 ratios8 are now exceeding 10 percent, against 7 percent in December 2008 (Figure 7.3).

Figure 7.3Tier 1 Ratio of EU Banks 2008–121

Source: European Banking Authority.

Note: Sample consists of 57 banks and excludes hybrid instruments.

1 Tier 1 ratio, excluding hybrid instruments, is used as a proxy for core Tier 1 ratio.

Publication of EBA stress test results allowed for enhanced transparency, but remaining data gaps impede market discipline. Enhanced transparency was achieved with the disclosure of over 3,000 data points by EU banks. However, consistent public data across banks are missing on many fronts, including the funding side (collateral encumbrance, ECB funding, liquidity coverage ratios), derivatives portfolio and other off-balance-sheet activities, risk-weighted assets, and probabilities of default.

In reaction to the crisis, a number of countries modified their approach to bank resolution. The United Kingdom created a special resolution regime and Germany adopted a restructuring law, both of which granted the authorities the power to utilize various resolution tools. Now both countries can sell failing businesses, that is, to transfer all or part of the business to a private sector purchaser, and or to create a bridge bank. The German Bank Reorganization Act (January 2011) also provides for an asset separation tool (the power to transfer all or part of a business to an entity, even if not a bank, in which the restructuring fund owns shares) and the possibility to bail-in senior unsecured creditors through a court-led proceeding on the initiative of the bank.

Several EU countries, including Greece, Italy, and Portugal, are involved in bankruptcy/insolvency law reform, including by introducing fast-track restructuring tools and an out-of-court restructuring process. For instance, repossession of the collateral backing a retail mortgage may take several years in Italy versus a few months in Scandinavia and United Kingdom. The asset recovery process remains prolonged in many emerging economies in Eastern Europe countries.9

Asset Quality and Asset Quality Reviews

Asset quality has held significant surprises in the course of the financial crisis and continues to cause concern. NPLs have jumped from 2.6 percent of total loans in December 2007 to 8.4 percent of total loans in June 2012 (Figure 7.4), outpacing loan growth in the EU (over the same reference period, loans have decreased by 3 percent and NPLs increased by almost 150 percent, that is, by €308 billion in absolute terms). European banks have also seen much larger NPL increases than the largest U.S. banks (Figure 7.5). This trend has not yet shown signs of reversal, reflecting the continued deterioration of the macroeconomic situation and the slow pace of restructuring.

Figure 7.4Nonperforming Loan (NPL) Ratio of EU Banks

(NPLs to Total Loans)

Sources: Bloomberg, L.P. and European Banking Authority.

Note: Ninety banks in sample. RWAs = risk-weighted assets.

Figure 7.5Trends in Nonperforming Loans: Europe versus the United States

(in billions of euros)

Source: Bloomberg, L.P.

Banks at the periphery of the euro area have been particularly hurt by this asset quality deterioration. There is a large dispersion in NPLs across European banks with those in the periphery countries Greece, Ireland, Italy, Portugal, and Spain witnessing the largest increases (Figure 7.6). For instance, the NPL ratio for Italy and Spain increased from 5 and 3.4 percent in early 2008 to 13 and 9.6 percent in June 2012, respectively. Ireland stands out with average NPLs close to 30 percent for our sample of banks followed by Hungary and Greece. However, definitions in this area are not harmonized and impair comparability across the EU.10

Figure 7.6Nonperforming Loan (NPL) Ratios (NPLs to Total Loans) Per Country

Sources: Bloomberg, L.P. and European Banking Authority.

The deepening financial crisis in Europe and larger-than-expected loan losses in some countries have heightened market skepticism about the soundness of banks in general. These concerns have sometimes resulted in entire banking systems being tarred with the same brush, including healthy ones that will need to shoulder the burden of restarting credit to the real economy.

In some of the countries subject to high financial stress, the authorities have embraced independent third-party diagnostics of asset quality, supplementing the EBA-led stress testing and recapitalization exercises, to regain market confidence in the system. Countries under/near financial assistance (Cyprus, Greece, Ireland, Portugal, and Spain) have carried out independent asset quality reviews to regain market confidence (Table 7.1). Self-assessments are usually difficult in a crisis environment because supervisors may be under political pressures to hide losses. The independent reviews have generally uncovered valuation problems that other supervisory exercises did not detect. In general, the reviews have paid off as several of the crisis countries have made progress toward restoring market credibility.

Table 7.1Asset Quality Reviews Conducted in EU Countries: 2008‒12
IrelandGreecePortugalCyprusSpain
Jan-Mar 2011Aug-Dec 2011Jul-Nov 2011Sept-Dec 2012May-Jun 2012
In December 2010, as part of the EU/IMF program, BlackRock Solutions was engaged to perform a loan diagnosis of over €275 billion across the five largest Irish banks.



The diagnosis had five building blocks:
  • an asset quality review to assess the quality of aggregate and individual loan portfolios and the monitoring processes employed;

  • a distressed credit operations review to assess the operational capability and effectiveness of distressed loan portfolio management in the banks including arrears management and workout practices in curing NPLs and reducing loan losses;

  • a data integrity validation exercise to assess the reliability of banks’data;

  • a loan loss forecast under base and stress scenarios; and

  • a public communication.

Under the loan loss forecast, BlackRock estimated future losses with forecasted financial statements through end-2013 (three-year horizon) as well as baseline losses.
As part of the 2nd Memorandum of Economic and Financial Policies, BlackRock was engaged to perform a loan diagnosis over all Greek banks.



Individual results were communicated to banks but no disclosure has been made to the public.
Under the EU/IMF program, the supervisor led detailed asset quality reviews of the eight largest national banking groups’loan portfolios and regulatory capital (RWA) calculations.



Those eight largest banking groups account for more than 80 percent of the banking system’s total assets.



This “Special Inspection Program” (SIP) was carried out with support from external parties, Ernst &Young, PWC, and Oliver Wyman.



The SIP had three different work streams:

  • the valuation of the credit portfolio,

  • a credit risk capital requirements calculation, and

  • a stress test conducted (by Olivier and Wyman).



The results of the W1 and W2 were made public in December 2011. The results of the W3 were not disclosed.
An asset quality review of the Cypriot banks will be conducted, including a stress test exercise.



The Central Bank of Cyprus appointed the investment companies Pimco and Deloitte to conduct the asset quality review of on 22 institutions, which is a mix of EU subsidiaries, cooperative credit institutions, and domestic banks.



The participating banks account for 73 percent of the Cyprus banking system.



The stress test will have a three-year horizon from mid-2012 to mid-2015.
Olivier and Wyman and Roland Berger were assigned to assess the resilience of the main Spanish banking groups (14 which hold 88 percent of the market asset share).



Cumulative credit losses for the top-down stress test with a three-year horizon are €250–270 billion in the adverse scenario and €170–190 billion in the base scenario.



The estimated capital needs range from €51–62 billion and €16–25 billion in the adverse and base scenario, respectively, and the capital buffer requirement of €37 billion for a core Tier 1 threshold of 7 percent.



The second part of the assessment with four domestic auditors was completed at the end of September.
Source: Authors’compilation.Note: NPL = nonperforming loan; RWA = risk-weighted asset.
Source: Authors’compilation.Note: NPL = nonperforming loan; RWA = risk-weighted asset.

Asset Management Companies

One way to address impaired assets is through asset management companies (AMCs). In previous financial crises, such AMCs have proven effective in addressing restructuring.11 The EU experience with asset management companies is at an early stage. A number of AMCs were established in the context of the crisis, including in Belgium, Denmark, Ireland, Spain, and the United Kingdom. AMCs are being set up in Cyprus and Slovenia, and AMCs were considered but ruled out in Iceland. It is too early to assess this experience fully but some observations can already be made.

While there is no single optimal solution in setting up AMCs, fair asset valuation, operational independence, appropriately structured incentives, and commercial orientation are key design features (Table 7.2). The experience in Ireland with setting up the National Asset Management Agency (NAMA) in late 2009 is that lack of a universally accepted methodology for the valuation of assets led to a protracted process whereby bank book values were repeatedly discounted, prolonging uncertainty, delaying normalization of bank funding, and undermining the credibility of the process.12

Table 7.2Asset Management Companies—Challenges and Key Design Features
Costs and BenefitsKey Design FeaturesEU Crisis Countries
AMCs allow consolidation of scarce workout skills and resources in one agency, and the application of uniform workout procedures:
  • help securitization because of the larger pool of assets;

  • provide greater leverage over debtors (especially if AMCs are granted special powers of loan recovery);

  • prevent fire sales or destabilizing spillover effects, as banks deleverage; and

  • allow the good banks to focus on their core business.



However, asset purchases by an AMC do not raise banks’ net worth unless the operation is done at above-market prices, which should be avoided. Asset purchases, thus, do not solve a problem of lack of capital in the banking sector.

The overall cost may be higher than expected, depending on the legal and operational environment for loan recovery and the likelihood of being subject to political pressure.
  • Governance: operational independence is necessary to assure the effective operation of an AMC.

  • Structured incentives: the AMC should not become a “warehouse” of NPLs and have incentives to ensure effective and efficient asset management and asset disposals.

  • Commercial orientation: assets should be purchased at a price as close to a fair market value as possible to minimize losses (possibly considering some form of profit-sharing arrangement).1



Funding shall be adequate. The AMC must have sufficient funds to perform its intended functions, with the operating budget separate from funding for asset takeover. In past crises, funding came from either the proceeds of government bond issues or the AMC’s own bond issuance backed by the government.

A key advantage of using a company without a banking license (an AMC) instead of a bank is that AMCs do not need to meet regulatory capital and liquidity requirements, thereby reducing their overall costs.
Ireland: the National Asset Management Agency (NAMA) was set up in December 2009, to help Irish banks divest of bad loans (Irish commercial property) and in turn receive governmentbacked securities as collateral against ECB funding. NAMA aimed to achieve this task by:
  • Acquiring bad loans from the five participating banks,

  • Working proactively on a business plan for acquiring and disposing of bad loans, and

  • Protecting and enhancing to the maximum possible level, the value of these assets.



Spain: the legislation enacted in August 2012 established the Asset Management Company for assets arising from bank restructuring (Sareb) and empowers the Fund for the Orderly Restructuring of the Banking Sector (FROB) to instruct distressed banks to transfer problematic assets to it.

Mid-December 2012, Sareb increased its capital to allow its main private participants (banks) to become shareholders.
Sources: Ingves and Hoelscher (2005); Enoch, Garcia, and Sundarajan, (2001); and Bank of Ireland, FROB websites.Note: AMC = asset management company; ECB = European Central Bank; NPL = nonperforming loan.

The Malaysian Danaharta, for example, purchased impaired loans at an average discount of 55 percent, while banks that sold assets retained the right to receive 80 percent of any recoveries in excess of acquisition costs that the AMC was able to realize.

Sources: Ingves and Hoelscher (2005); Enoch, Garcia, and Sundarajan, (2001); and Bank of Ireland, FROB websites.Note: AMC = asset management company; ECB = European Central Bank; NPL = nonperforming loan.

The Malaysian Danaharta, for example, purchased impaired loans at an average discount of 55 percent, while banks that sold assets retained the right to receive 80 percent of any recoveries in excess of acquisition costs that the AMC was able to realize.

Funding of an AMC is a key design feature. The AMC must have sufficient funds to perform its intended functions, with the operating budget separate from funding for asset takeover. In past crises, funding came from either the proceeds of government bond issues or the AMC’s own bond issuance backed by the government, with losses absorbed by the budget as private investor participation is unlikely to materialize in the early stages.13 There are a few precedents for central bank funding of AMCs, most involving protection against potential losses. A number of central banks in Central and Eastern European transition economies were engaged in funding AMCs or bad banks; the losses incurred were covered by the national budget or over time via seignorage. The Swiss National Bank (SNB) supported in 2008 the transfer of illiquid securities and other troubled assets of UBS to a special purpose vehicle—the Swiss Stabilization Fund—controlled and mainly funded by the SNB.14 Protections were provided to the SNB in the form of loan overcollateralization and warrants for UBS shares, to cover any losses on liquidation of assets. The broad recovery of secondary market asset valuations in 2010 allowed the fund to dispose of assets with sales mostly above their intrinsic values. In the euro area, in most cases, funding for AMCs has been provided by the sovereign which in some cases has been expensive and had to be supported with official financing from external sources.

Finally, the size of the impaired assets under management of AMCs is quite large compared to the economy. Working through these assets quickly to allow asset prices to find their new equilibrium and attract new private investment will be important. While there are tradeoffs between speed and financial stability, an excessively drawn out process of asset disposal by AMCs may dampen the outlook. For example, SABER has a portfolio of about €50 billion in assets, which it intends to sell off at a very slow pace of a few billion euros per year.

How Far has Bank Restructuring Come?

Most EU banking systems appear well-capitalized, but pockets of vulnerability remain, and leverage is still high. The average Tier 1 capital ratio now exceeds 9 percent. Individual bank capital Core Tier 1 capital buffers—consistent with Basel III norms—also appear to be strong as of June 2012, even after accounting for buffers for specific sovereign exposures requested for the EBA recapitalization exercise. According to the benchmark considered, only four banks in the EBA sample appeared to have Core Tier 1 ratio below 9 percent after sovereign buffers.

Still, in spite of generally solid regulatory capital ratios, many EU banking systems, in particular where large universal banks account for a significant share of assets, remain highly leveraged, in particular in Belgium, France, Italy, and the United Kingdom (Figure 7.7). Concerns have been expressed about the consistency of the Basel risk weights across firms. During the last EBA recapitalization exercise, 30 percent of the shortfall that banks were required to make up was met through reduction in risk-weighted assets (RWAs), of which €10 billion came through RWA “recalibrations” (validation, roll out, or changes to parameters of internal models). Such recalibrations of RWAs are expected to continue, contributing to opacity in bank capital computations. The recent Bank of England Financial Stability Report (November 2012) showed that banks’ RWAs calculations for the same hypothetical portfolio can be vastly different, with the most prudent banks calculating over twice the needed capital as do the most aggressive banks.

Figure 7.7EU Large Banks Capital-to-Asset Ratio

Source: IMF Financial Soundness Indicators.

Note: 2012:Q2, except Bulgaria (2009); Spain; France (2010); Latvia; Slovak Republic (2012:Q1); and the United Kingdom (2011:Q4).

Funding remains a large challenge, especially for banks in the euro area periphery. Many such banks are heavily reliant on ECB funding, with challenges on asset encumbrance and collateral eligibility due to, for instance, rating downgrades, valuation effects on their collateral, and overall loss of market confidence. Banks in Greece and Ireland have also substantially used emergency liquidity assistance. Following the announcement of the Outright Monetary Transactions program by the ECB, funding conditions have somewhat eased for banks in the periphery countries, and some have been able to issue debt in primary markets; and bank credit default swap spreads in the periphery have been easing. However, wholesale funding remains prohibitively expensive for the euro area periphery banks to sustainably support lending in the current environment.

Many large EU banks are structurally reliant on wholesale financing while the interbank funding markets are heavily concentrated on both the demand and supply side. This reliance on potentially volatile funding turned out to be a significant vulnerability during the euro area financial crisis. Several banks failed partly as a result of weak wholesale funding models and risk management (Dexia, HRE, and LBBW). Several key euro area systemically important financial institutions remain largely dependent on wholesale or derivative funding. For example, the funding of BNP Paribas is about 70 percent wholesale and derivative funding. Most of the demand for interbank funding in the EU originates from large banks in France, Germany, Italy, Spain, and the United Kingdom. Similarly, the source of interbank funds is also very concentrated, as funding from within the EU account for more than two thirds of total interbank funding.

Many European cross-border banks have significant overseas activities funded in U.S. dollars. A significant part of this funding has remained short-term, contributing in creating structural funding gaps (for example, the gap between long-term assets and long-term funding in U.S. dollars) in balance sheets, including among euro area banks. These funding gaps remained significant at the end of quarter two of 2012, in spite of heavy reductions in U.S. dollar assets of French and German banks.15

EU banks liquidity buffers remain low. Indicators of liquidity such as the ratio of liquid assets to short-term liabilities, however, suggest that many European banks are lacking sufficient liquidity buffers. In aggregate, liquid assets exceed short-term liabilities of the banking system only in Germany, the Netherlands, Portugal, and Romania. Moreover, the level of collateral pledged in the Eurosystem may have reduced available collateral funding going forward, in particular in countries under stress.

Profitability is generally low, and there is significant heterogeneity across and within countries. Return on assets remains generally low across EU banking systems, with significant variations across EU countries (Figure 7.8). The highest profitability, observed in emerging European countries, partly reflects higher interest margins in some of these countries. Return on equity has declined since the crisis, and large proportions of domestic banking systems are not profitable in peripheral EA countries, Austria, and the United Kingdom.

Figure 7.8EU Large Banks: Return on Equity (RoE) Distribution

Source: Financial Stability Committee, European Central Bank.

Note: AUT = Austria; BEL = Belgium; BGR = Bulgaria; CYP = Cyprus; CZE = Czech Republic; DEU = Germany; DNK = Denmark; FIN = Finland; FRA = France; GRC = Greece; IRL = Ireland; ITA = Italy; LTU = Lithuania; LUX = Luxembourg; LVA = Latvia; MLT = Malta; NLD = Netherlands; POL = Poland; PRT = Portugal; ROM = Romania; SWE = Sweden; SVN = Slovenia; SVK = Slovak Republic; GBR = United Kingdom.

Challenges Ahead

An environment of very low interest rates, quantitative monetary injections, tolerated forbearance, and government backstops has helped avoid very abrupt restructuring and an intense credit crunch, but the underlying pressures remain. The policies in place are not by themselves a solution, and must be combined with sound macroeconomic policies and comprehensive restructuring strategies. The inevitable exit from these policies will constitute a major challenge to the EU’s banking system.

The weak outlook constitutes a threat even to healthy financial institutions. The economic environment in much of the EU remains weak. The recession in most of the periphery has been spilling into other EU economies (see IMF, World Economic Outlook, October 2012). Activity in the EA is expected to contract by 0.3 percent in 2013 (World Economic Outlook Update, July 2013). This reflects delays in the transmission of lower sovereign spreads and improved bank liquidity to private sector borrowing conditions, and still high uncertainty about the ultimate resolution of the crisis despite recent progress. Credit conditions are still tight in some EU countries, especially those in the periphery and the emerging economies in the EU, which threatens the economic recovery.

Over the medium-term, the absorption of the many changes to the regulatory environment, the remaining uncertainty over some of the parameters of these reforms, and the need to make large financial institutions resolvable will undoubtedly further affect the structure of the EU’s banking system (see Part III for more discussion).

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Ten percent in June 2012 against 7 percent in December 2008; 57 EU banks (EBA).

While banks were rarely closed, some have downsized by closing branches, selling or closing business lines, and significantly reducing their staff levels in some cases.

Total bank assets account for 283 percent of GDP in the EU, compared to about 65 percent of GDP in the United States.

From 10.7 percent to 10.9 percent (sample of the largest 90 EU banks included in the 2011 EBA stress test), Bloomberg.

The Treaty on the Functioning of the European Union contains strict limitations on state aid to avoid distorting competition and the internal market. According to the Article 107 of the treaty, no state aid should be granted in any form which distorts or threatens competition. However, state aid can be exceptionally allowed under paragraph 3 of Article 107 in cases of serious disturbances to the economy.

The second EBA stress test (2011) that included 90 banks examined the resilience of the European banks against a single adverse macroeconomic scenario, using a core Tier 1 (CT1) capital threshold of 5 percent.

The EBA recapitalization exercise recommended a higher core Tier 1 capital (CTI) target of 9 percent by end-June 2012 after establishing a sovereign buffer against banks’ holdings of government securities based on a market-implied valuation of those holdings as of September 2011.

The Tier 1 excluding hybrid instruments so that it gives a proxy of the core Tier 1 ratio in EBA definition.

The European Banking Coordination “Vienna” Initiative (2012) in a working group focused on NPL issues in central, eastern, and southeastern Europe. Recommendations, among others, focused on establishing a conducive legal framework for NPL resolution and removing tax impediments and regulatory obstacles, as well as enabling out-of-court settlements.

Across European countries, there can be large differences in NPL definitions, making asset quality assessment across countries and banks difficult.

Examples include the U.S. Resolution Trust Corporation and the Thai Financial Sector Restructuring Agency; U.S. Maiden Lane LLCs established by the Federal Reserve to resolve Bear Sterns and AIG, and Sweden’s Securum; the Korea Asset Management Institution and the Malaysian Danaharta. Centralized AMCs, often with broad mandates, were also widely used during the 1990s transition in Central and Eastern Europe, for example, in the Czech Republic, Georgia, Hungary, Kazakhstan, Lithuania, Macedonia, Slovakia, and Ukraine.

NAMA had acquired assets with a nominal average discount of over 50 percent. The process lasted for over a year and required detailed asset-by-asset valuation. The alternative, nationalization combined with a creation of a “good bank” has been used in Latvia for resolving Parex bank in 2008–2010.

For instance, in Ireland banks received government-guaranteed securities in return for assets transferred to the Irish National Asset Management Agency (NAMA).

Assets were transferred to the fund at market prices and thus, on average, with a discount to notional value. Asset transfer from UBS was financed by a 90 percent loan from SNB, backed by a security interest in all the fund’s assets, and 10 percent financing contribution from UBS. Management of assets was outsourced to UBS and UBS was given an option to repurchase the fund.

Estimates from Bank for International Settlements data suggest that French and German banks have reduced their gross U.S. dollar assets by respectively US$270 billion and US$100 billion between 2011:Q2 and 2012:Q2.

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