I wrote something yesterday about my thoughts on the proposed asset management company and i have a few extra thoughts to share on the subject. It seems a lot of countries have tried to use AMC’s to deal with non-performing loans all with various degrees of success. I found a paper that analyzed the effects of AMC’s in seven different countries and the results are very interesting. The bottom line is AMC’s have partial success in actually achieving their “narrow” goal of removing toxic assets from targeted companies or corporate restructuring with strength of the legal system, independence from politics, the kind of assets in question ( with simpler assets like real estate backed loans the easiest to deal with) and the relative size of the problem a major factor. AMC’s set up to tackle small specific problems were more successful. On a side note, none of the countries studied were successfully able to sell off these assets with fobaproa of Mexico only able to sell off only 0.5% of its assets after four years and ATP of the Philippines still having 50% of its assets after 12 years.
However the main point of the AMC’s was to enable banks resume lending and the study shows that there is no evidence of AMC’s improving bank lending or reducing non-performing loans in the long run. With the exception of Spain (even though we can strike them off now) all the countries went on to experience similar crises some time after the AMC’s were set up.
It seems to support the idea that AMC’s might be succesful in removing the toxic assets from our banks but will probably not prevent banks from making similar risky decisions which led to this crisis in the first place. If anything they would be expected to make even riskier decisions.
So if AMC’s don’t necessarily solve the problem long-term then what does?
You can read the paper here