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The author is grateful to Michael Andrews, Barbara Baldwin, Charles Enoch, Ed Frydl, Ann-Marie Gulde, Peter Hayward, Seng Chee Ho, Alain Ize, Mats Josefsson, Barry Johnston, Daniela Klingebiel, Bernard Laurens, Carl-Johan Lindgren, Elizabeth Milne, Jun Nagayasu, Charles Siegman, Mark Stone, Jan Willem van der Vossen, and Delisle Worrell for helpful comments.
The discrepancy between these numbers may be due to some extent to different loan classification rules in the four countries.
An example would be a nonperforming loan of which the lender can eventually recover at least a portion of the value by liquidating its underlying collateral. Until liquidation is completed, the lender’s funds are tied up by the loan, whereas they could be put to use by a viable borrower in the form of a new credit. The same may also be true for the collateral of a nonperforming loan (a factory, commercial or residential properties) which, until it is sold and reemployed in the economy, may be left idle, thus performing no useful function even as depreciation sets in.
Many countries require banks facing a rise in their nonperforming assets to increase their loan loss provision. When such provision is substantial, it can result in a reduction in bank capital, which can, in turn, limit the ability of banks to make new loans. This phenomenon (which is often exacerbated by flights to quality over concerns about the solvency of the banks in question) is sometimes referred to as a “credit crunch” (Bernanke and Lown, 1991; Woo, 1999).
This may be the case when debtors fall into arrears over their debt repayment mainly due to the weakness of the general economic environment than to any inherent problem in their viability.
When the holder is a financial institution, this amounts to 100 percent provisioning.
For example, a substantial increase in nonperforming loans may cause lending rates to rise for all borrowers if risk-averse banks do not have proper credit assessment capabilities. Worse still, asymmetric information is likely to lead to unsound and risky borrowers (who are willing to pay higher interest rates) forcing good borrowers to withdraw from the credit market (Stiglitz and Weiss, 1981).
On the other hand, it is also true that the quality and thus the value of some assets can deteriorate rapidly once they become nonperforming.
An example could be the case of a bank which, due to weak provisioning requirements, appears to be in compliance with the prevailing capital adequacy requirement (the weak provisioning requirements allow the bank to overstate the value of its loans or collateral). Since selling its loans would force the bank to recognize the market value of its portfolio and thus the true value of its capital, the bank may prefer to hold on to the loans.
These taxes are charged—usually irrespective of whether the transaction represents a loss or a gain for the sellers of the transaction—either on a fixed rate basis or as a percentage of the value of the transaction.
At the same time, high interest rates can further erode the quality of these assets by increasing the interest burden on the obligors.
Market observers have suggested that the near zero interest rates in Japan were one of the main factors for the stagnation of the Japanese real estate market in the 1990s.
The proponents of this view often favor in-house asset management departments which retain direct access to the existing institutional knowledge base about the assets under their management.
An example of this is the Mexican portfolio purchase program during 1995-96. The program involved the FOBAPROA (Fondo Bancario de Proteccion al Ahorro) purchasing nonperforming loans in an amount equal to twice the private contribution to capital, including subordinated debt, made by existing and new shareholders. The FOBAPROA purchased the loans at book value (net of provisions) with ten-year zero-coupon bonds. Although the responsibility for administering the loan portfolios remained with the selling financial institutions and there is a limited government-bank loss sharing arrangement, the government was exposed, and still is, to potential losses arising from a further deterioration in the quality of the loans. By purchasing the nonperforming loans from banks at book value, the FOBAPROA was essentially offering the banks free capital or a subsidy.
As will be discussed later, KAMCO mandate is wider than that of a liquidator of closed banks.
The five insolvent banks are Dongnam, Ching Chong, Dong Hwa, Kyungki and Dae Dong, and the five healthy banks are Kookminm Shinhan, Koram, Housing and Commercial, and Hana Bank.
This put option is useful when the government wants to sell more of the borderline loans of an insolvent financial institution or when the uncertainties of the economy are liable to obscure the prospect of the quality of the bank loan portfolio.
About 70 percent of Nordbanken was already owned by the government when the problems surfaced.
A shareholder settlement agreement was reached in 1998 which requires former owners of failed banks to repay the government Rp 110 trillion.
The difference is that instead of the asymmetric gain/loss sharing arrangement of the Radanasin sale, a symmetric arrangement was agreed. Specifically, Nakornthon will receive 15 percent of any upside and will be responsible for 15 percent of any downside from asset recovery relative to the agreed upon estimated market value of the assets.
On completion of the acquisition, Danaharta issues vesting certificates to evidence the acquisition. The vesting certificates will then be accepted for purpose of registration. For example, upon producing the vesting certificate, the Registrar of Land will record Danaharta’s interest as the new chargee in place of the selling bank.
Asset markets are vulnerable to failure during financial crises because of market participants’ uncertainties about the future and the perceived lack of information in asset prices. This may arise from the belief that prices do not reflect the fundamental value of assets (they may, for example, reflect only the liquidity condition of the sellers).
To preserve the assets of the borrowers, a 12-month moratorium takes effect with the appointment of the special administrator. During this time, creditors are not allowed to take actions against the borrower.
For example, Chapter 11 in the United States.
Due to the objection of foreign banks involved in workouts in the United Kingdom on the grounds that formalizing such a framework would invite legal challenges, and perhaps scrutiny from their national supervisors, the Bank of England decided against formalizing the workout framework in a written document (Kent).
The steering committee is backed by the Financial Supervisory Commission, which is in charge of financial restructuring and supervision.
These include deduction of written-off debt from taxable income for the creditor; elimination or deferral of corporate income tax on written-off debt for the debtor; elimination of all taxes on asset transfer from debtor to creditor (income tax, special business tax, stamp duties, and VAT); elimination of taxes on accrued but unpaid interest, and the limitation of taxes on restructuring involving interest rate reductions by creditors.
The RTC sometimes covered these risks by adding additional funds to the cash reserves or by using excess interest payments to accelerate the paydown of the classes that were subject to basis risk (FDIC, 1998).
The real estate properties are occupied and producing positive cash flows.
The RTC’s other missions were to (a) minimize the impact of its activities on local real estate and financial markets and (b) maximize the preservation of the availability and affordability of residential property for low- and moderate-income individuals.