Bad assets options and bank resolution in Europe: Lessons learned in and after the 2008 financial crisis

Purpose - This paper analyzes the new EU Bank Recovery and Resolution Directive (BRRD) to determine the level of guidance on instruments to wind-down bad asset portfolios of asset management vehicles. In the absence of such detailed guidance stipulated by the BRRD, the aim is to provide certain prac...

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Bibliographic Details
Published in:The journal of risk finance 2015-01, Vol.16 (5), p.486-497
Main Author: Paetzmann, Karsten
Format: Article
Language:English
Subjects:
Asset management
Bailouts
Bank failures
Banking
Banking industry
Banks
Central banks
Economic crisis
Finance
Reduction
Regulation of financial institutions
Regulatory reform
Strategy
Unions
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Summary:Purpose - This paper analyzes the new EU Bank Recovery and Resolution Directive (BRRD) to determine the level of guidance on instruments to wind-down bad asset portfolios of asset management vehicles. In the absence of such detailed guidance stipulated by the BRRD, the aim is to provide certain practical guidance to future resolution planning and execution. Design/methodology/approach - This paper draws upon experience from portfolio reduction strategies applied at European bad banks in the aftermath of the 2008 financial crisis. For illustration purposes, the paper use case study data from a bad bank located in the eurozone. Findings - For the new European Commission, implementation and enforcement of the Banking Union within the eurozone is currently a key priority. Present efforts are mainly directed towards minimum technical standards. However, the fundamental question of how to orderly unwind a bad assets portfolio without the usage of public funds remains partly addressed only. While a uniform approach to any bad asset does not seem to be applicable, certain lessons learned from previous financial crises may contribute to a selection of reduction strategies. Research limitations/implications - This paper draws upon experience from portfolio reduction strategies applied at European bad banks in the aftermath of the 2008 financial crisis. It includes case study data from the wind-down of a eurozone bad bank detailing the asset reduction strategies achieved so far. Such per asset class wind-down patterns have not been published and commented on in academia so far.
ISSN:1526-5943
2331-2947
DOI:10.1108/JRF-06-2015-0058