The odds are against NAMA working.
That is a totally irresponsible risk to take.
In a study sample of 40 countries banking crisis between 1970 and 2000 only 15 used a NAMA ( a centralised asset management company)
In a study of seven countries that have tried it only three can be said to have acheived their goal.
See excerpts (below) from two World Bank research reports
Controlling the Fiscal Costs of Banking Crises
The World Bank Development Research Group
Finance and Financial Sector Strategy and Policy Department
II. The costs of banking crises No type of country has been free of costly banking crises in the last quarter century. The prevalence of banking system failures has been at least as great in developing and transition countries as in the industrial world. By one count, 112 episodes of systemic banking crises occurred in 93 countries since the late 1970s and 51 borderline crises were recorded in 46 countries (Caprio, Klingebiel 1999). Governments and, thus ultimately taxpayers, have largely shouldered the direct costs of banking system collapses. These costs have been large: in our sample of 40 countries governments spent on average 12.8 percent of national GDP to clean up their financial systems (Figure 1 shows some of the higher costs in our sample). The percentage was even higher (14.3) in developing countries. Some crises have led to much larger outlays: governments spent as much as 40-55 per cent of GDP in the early 1980s crises in Argentina and Chile. A substantial part of the costs of the recent East Asian crisis – now projected in the region of 20-55 per cent of GDP for the three worstaffected countries – will ultimately fall on the budget. Despite the fact that their economies are small, developing economies as a group have suffered cumulative fiscal costs in excess of $1 trillion. Among industrialized countries, Japan’s long- and drawn out banking crisis has been the costliest; to date, the Japanese authorities have spent around 20 percent of GDP to restructure the system. Fiscal outlays are not the only dimension in which banking collapses impose costs on the economy. Indeed, to the extent that bailing-out depositors amounts to a transfer from taxpayers to depositors, this is not a net economic cost at all. But, when a government makes the bank’s claimants whole, its net costs tend to be correlated with the true economic costs. For one thing, the deficiency to be covered reflects the prior waste of investible resources from bad loan decisions. Furthermore, the assumption by government of large and unforeseen bail-out costs can destabilize the fiscal accounts, triggering high inflation and currency collapse — costly in themselves — as well as adding to the deadweight cost of taxation.
Asset management companies. The two extreme choices for asset resolution strategies include setting up a government agency with the full responsibility of acquiring, restructuring, and selling the assets-the so-called centralized approach-or letting banks manage their own non-performing assets-the so-called decentralized approach. Opponents of centralized asset management companies (AMCs) argue that such agencies face a number of obstacles to operate effectively. They maintain that it may be difficult to insulate those entities against political pressure especially if they hold a large portion of corporate claims. Furthermore, they point out that a transfer of loans breaks the links between banks and corporations, links that may have positive value given banks’ privileged access to corporate information. And finally, they continue if AMCs do not manage their assets actively, credit discipline in the whole financial system can be undermined, increasing the overall costs of the crisis. Proponents of centralized AMCs observe that the centralization of assets permits a consolidation of skills and resources, as well as easier monitoring and supervision of workout practices. They argue that, as claims are consolidated, more leverage will be obtained over debtors and perverse links between banks and corporations can be broken, thus allowing better collection on (connected) loans.’
Table 1: Characterizing Government Responses to Banking Crisis
Policy Tools implemented___No of countries Liquidity Support LIQSUP 23 Unlimited Guarantee GUAR 23 Forbearance (a) FORB-A 9 Forbearance (b) FORB-B 26 Repeated Recapitalization RECAP 9 Centralized AMCs AMC 15 Public debt relief prog-am PDRP 9 ………………………………………….. Out of a total of 40 countries.
FROM: The Use Of Asset Management Companies In The Resolution Of Banking Crises Cross-Country Experiences Daniela Klingebiel World Bank – Policy Unit February 2000 World Bank Policy Research Working Paper No. 2284
Abstract: Asset management companies have been used to address the overhang of bad debt in a country’s financial system – by expediting corporate restructuring or rapidly disposing of corporate assets. A study of seven cases suggests that such companies tend to be ineffective at corporate restructuring and are good at disposing of assets only when they’re used to meet fairly narrow objectives in the presence of certain factors: An easily liquefiable asset (such as real estate), mostly professional management, political independence, adequate bankruptcy and foreclosure laws, skilled resources, appropriate funding, good information and management systems, and transparent operations and processes.
Asset management companies have been used to address the overhang of bad debt in the financial system. There are two main types of asset management company: Those set up to expedite corporate restructuring and those established for rapid disposal of assets. A review of seven asset management companies reveals a mixed record. In two of three cases, asset management companies for corporate restructuring did not achieve their narrow goal of expediting bank or corporate restructuring, suggesting that they are not good vehicles for expediting corporate restructuring.
Only a Swedish asset management company successfully managed its portfolio, acting sometimes as lead agent in restructuring – and helped by the fact that the assets acquired had mostly to do with real estate, not manufacturing, which is harder to restructure, and represented a small fraction of the banking system’s assets, which made it easier for the company to remain independent of political pressures and to sell assets back to the private sector.
Asset management companies used to dispose of assets rapidly fared somewhat better. Two of four agencies (in Spain and the United States) achieved their objectives, suggesting that asset management companies can be used effectively for narrowly defined purposes of resolving insolvent and inviable financial institutions and selling off their assets.
Achieving these objectives required an easily liquefiable asset – real estate – mostly professional management, political independence, adequate bankruptcy and foreclosure laws, appropriate funding, skilled resources, good information and management systems, and transparent operations and processes. The other two agencies (in Mexico and the Philippines) were doomed from the start, as governments transferred to them politically motivated loans or fraudulent assets, which were difficult for a government agency susceptible to political pressure and lacking independence to resolve or sell off.
This paper – a product of the Financial Sector Strategy and Policy Group – is part of a larger effort in the group to study the management of banking crises.
JEL Classifications: G28, G29, G34
Working Paper Series Date posted: September 12, 2001 ; Last revised: December 08, 2004 Suggested Citation
Klingebiel, Daniela, The Use Of Asset Management Companies In The Resolution Of Banking Crises Cross-Country
Experiences (February 2000). World Bank Policy Research Working Paper Series. Available at SSRN:
http://ssrn.com/abstract=282518 or DOI: 10.2139/ssrn.282518