EC guidance on impaired assets of European banks

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26 Feb 2009

The European Commission has published a Communication with guidance on the treatment of impaired assets in the EU banking sector.

While the guidance covers measurement and disclosure of impairment, it also encompasses management of impaired assets, including state aid and relief schemes, The guidance is based on a number of principles:
  • Full transparency and disclosure of impairments, which has to be done prior to government intervention.
  • Coordinated approach to the identification of assets eligible for asset relief measures through development of eligible categories of assets.
  • Coordinated 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. This valuation is for the purpose of providing government aid to banks (for instance, troubled asset purchase or insurance programmes). The Communication does not appear to address financial reporting issues.
  • 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.
  • Adequate burden-sharing of the costs related to impaired asset between the shareholders, the creditors and the State.
  • Adequate remuneration for the State, at least equivalent to the remuneration of State capital
  • Coverage of the losses incurred from the valuation of the assets at real-economic-value by the bank benefiting from the scheme.
  • 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.
  • Management of assets subject to relief so as to avoid conflicts of interests.
  • 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.
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