Broad-Based Asset Management Programs

Andrew Metrick

Journal of Financial Crises, 2021, vol. 3, issue 2, 41-80

Abstract: Dealing with high levels of nonperforming assets (NPAs) on bank balance sheets is one of the most challenging aspects of financial crisis management. High levels of NPAs can interfere with both bank profitability and general economic growth by increasing uncertainty about bank solvency and therefore funding costs, tying up resources and attention, and inhibiting new lending. One potential solution to the NPA problem is a centralized, government-driven effort to remove these assets from troubled institutions and then manage and sell them. Though such broad-based asset management (BBAM) programs existed even earlier in history, they appear to have become more common beginning in the 1980s and 1990s with the shift toward market-based financial systems in Africa, South America, and the former Soviet bloc, as well as with the advent of the Asian Financial Crisis. They were also a feature of the response to the Global Financial Crisis. While BBAM programs have been widely used, whether or not such a program makes sense to address a given situation is highly context-specific, and special attention must be paid to the incentives of those involved. Important considerations include the political and legal context in which the program will operate, the nature and extent of the NPAs to be managed, and the availability of the necessary expertise. There is also evidence to suggest that BBAM programs are ineffective in isolation and must be coupled with recapitalization.

Keywords: asset management companies; nonperforming loans; nonperforming assets (search for similar items in EconPapers)
JEL-codes: G01 G28 (search for similar items in EconPapers)
Date: 2021
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