Distressed assets and fiscal-monetary support: are AMCs a third way?

Reiner Martin, O’Brien, Edward, M. Udara Peiris and Dimitrios P. Tsomocos

No 3023, Working Paper Series from European Central Bank

Abstract: Following the Global Financial Crisis of 2007-8, Ireland, Slovenia, and Spain set up public Asset Management Companies (AMCs), purchasing delinquent loans equal to 44%, 16%, and 10% of GDP, respectively. Though deemed successful, it’s unclear if this was de facto traditional capital and liquidity support. We show that AMCs have a systematic advantage in reducing pecuniary externalities and costs associated with loan delinquencies. AMCs enhance average returns to bank lending, promoting additional lending (bank lending channel) and improving corporate borrowers’ balance sheets (balance sheet channel). The welfare gains of well-designed and well-managed AMCs are between 0.2% and 0.5% of steady-state consumption, independent of whether they are financed through fiscal transfers or sterilized monetary transfers; AMCs can complement traditional fiscal and monetary policies in managing financial crises. JEL Classification: E44, G18, G21, G28

Keywords: AMC; distressed assets; eurozone; fiscal policy; monetary policy (search for similar items in EconPapers)
Date: 2025-02
New Economics Papers: this item is included in nep-cba, nep-fdg and nep-mon
Note: 339083
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