Thursday, October 3
Ms. Cyn-Young Park, Director, Regional Cooperation and Integration, ADB
The Asian financial crisis (AFC) of 1997–98 was a watershed moment for many Asian economies. Non-performing loans (NPLs) were particularly problematic for crisis-affected countries because their financial systems were bank-based. Ms. Park reviewed the Asian experience of using public asset management companies (AMCs) and other options for addressing large-scale, systemic NPL problems. Although there is no universal remedy, lessons from the AFC can illuminate strategic directions and offer policy suggestions for European economies dealing with NPLs.
Soon after the AFC began, many Asian economies established AMCs to acquire, manage, and dispose of impaired bank assets. Reviewing the experiences of the Republic of Korea, Thailand, Indonesia, Malaysia, the Philippines, and the People’s Republic of China, Ms. Park explained that establishing public AMCs involve many legal and policy choices about, e.g., their institutional setup and capacity, governance and board structures, and the laws necessary for them to function properly. Well-functioning court systems, efficient and transparent bankruptcy regimes, good corporate governance, and effective collateral registration and secured transaction systems also proved essential in resolving NPLs.
Drawing from this cross-country experience and from recent empirical analyses by ADB staff, Ms. Park noted that early resolution of NPLs proved to be essential for restoring banking and financial stability in Asia; in particular, centralized public AMCs with clear mandates and government commitments worked well. Recovery of the real sector is closely tied with financial sector recovery, because banks with distressed assets would have added to credit frictions. Fiscal and monetary intervention, even on a large scale, may not be effective if monetary policy transmission is negatively affected by rising NPLs. In that case, public AMCs can be part of comprehensive financial safety nets to avert the massive cost of crisis resolution. They can also support trans-national, regional financial cooperation to harmonize standards, definitions, regulations, and practices in order to collectively address regional NPL issues.
Turning to NPL resolution generally, Ms. Park considers it crucial to develop secondary NPL markets domestically, and ultimately regionally. So far in Asia such markets are either underdeveloped or nonexistent, but they could greatly benefit Asian economies with relatively high NPL ratios. Given the absence of effective private sector demand for distressed assets and markets to resell restructured debts in these countries, public AMCs can be instrumental in building such markets by, e.g., linking buyers and sellers and promoting securitization of NPLs.
During the subsequent discussion, Ms. Park explained that after the AFC, Asian public AMCs mainly resolved distressed corporate loans because household loans constituted only a small share of Asian bank assets. Asked about governance of the AMCs Ms. Park clarified that they were controlled by boards representing both the private and the public sector and government influence was strong. However, she stressed that today the quality of corporate governance would be much more critical for the success of AMCs, public or private, because government influence has waned. Asked whether Asian public AMCs had special legal powers to resolve NPLs, Ms. Park said no—with neither securitization options or clear creditor rights, the crisis-affected countries relied mainly on restructuring committees and out-of-court processes to work out distressed corporate loans. However, public AMCs did catalyze the legal and institutional reforms necessary for resolving NPLs and restructuring debt.
Mr. Richardson closed the discussion by noting that the swift and decisive approach with which Asian countries tackled their post-AFC NPL problems can provide important lessons for Europe today.
Reiner Martin, Lead Economist, JVI