Banks need to get rid of their toxic assets - complex debt securities linked to the disastrous US subprime mortgage market - to restore market confidence, but there is no agreement on how to identify and price such bad debt.
"We will present in a couple of weeks or so a document with the guidelines we consider are necessary for the process of asset purchases or asset insurance," Economic and Monetary Affairs Commissioner Joaquin Almunia told a news conference on Tuesday (10 February). "The idea is tor produce a document with a clear framework for the valuation of these assets, for the list of assets eligible for these schemes, for the conditionality for those banks who will receive support, and for the restructuring when needed," he said.
"What we are pursuing through this treatment of impaired assets is to restore lending, the normal functioning of the credit market," Almunia said after EU finance ministers agreed at a monthly meeting that they need a common approach to the sensitive issue, and that a fair, transparent valuation of such assets was key.
"One of biggest problems for the EU is agreeing how to value toxic assets," German Finance Minister Peer Steinbrueck said. "We haven't solved that yet." Diplomats are concerned that unless there is a common valuation method in the EU, some banks may get better terms from their governments when they unload their toxic assets than others, distorting competition in the single EU market.
French Economy Minister Christine Lagarde said the ministers hoped to reach a deal at the end of February. The ministers left it up to individual countries to choose under what arrangement the toxic assets would be neutralised: either bought up by a "bad bank" or insured.
The Tuesday discussions included proposals from the Commission which said governments may have to press some banks into participation in the asset relief plans.
"Such mechanisms could include mandatory participation in the programme or at least mandatory disclosure to the supervisors," the Commission said in a document prepared for the ministers' meeting.
It suggested banks should be given six months to enrol in schemes where they qualify for aid in return for coming clean on their troubled assets.
"Impaired asset relief programmes should have an enrolment window limited to six months so as to limit incentives for banks to delay necessary disclosures in the hope of higher levels of relief later on," it said.
It said that in return for the public aid on toxic debt, banks may be asked to downsize or divest profitable business units or subsidiaries.
"Management remuneration and dividend policy will have to be aligned in order to ensure the fulfilment of the public policy objectives of the state intervention. Dividend distribution may need to be restricted," it said.
The asset relief programmes, as the Commission called them, should also hinge on a declaration from the bank that it would lend to the real economy.
The Commission said that as a general principle the valuation of toxic assets should be done and certified by an independent expert and validated by relevant supervisory authorities or another official independent body designated by the government prior to granting support.
(With Reuters).
