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  1. 1. Moscow, June 2003 ASSET MANAGEMENT COMPANIES AND NON-PERFORMING ASSETS The Asian Experience Presentation for the Third International Non-Performing Assets Forum Elena Miteva, Administrator, OECD This presentation draws on papers discussed at the OECD Forum for Asian Insolvency Reform and in particular on work by Robert Zafft, Senior Corporate Governance Specialist, OECD and Lampros Vassiliou, Senior OECD Consultant. However, any mistakes and inconsistencies are to be attributed solely to the author.
  2. 2. To achieve long-term stability and growth, Asia needs to focus on the fundamentals of insolvency and creditor rights systems <ul><li>In the aftermath of the crisis, emergency measures were taken to stabilise the economy and the financial sector </li></ul><ul><li>Post-crisis measures averted financial system meltdown, but did not successfully address the underlying behaviours and structural weaknesses </li></ul><ul><li>By mastering the fundamentals, Asian economies can address these behaviours and problems and achieve stability and growth </li></ul>
  3. 3. Asset Management Companies formed a crucial part of emergency measures to address the 1997 crisis <ul><li>Creation of legal framework for investment in distressed assets and bulk sales of non-performing loans ( NPLs ) </li></ul><ul><li>Establishment of limited-life, specialised asset management companies ( AMCs ) </li></ul><ul><li>Introduction of new rescue procedures to insolvency regimes </li></ul><ul><ul><li>Formal restructuring (often modeled on US Chapter XI); and </li></ul></ul><ul><li>Development of informal workout practices </li></ul><ul><ul><li>Informal restructuring (London approach). </li></ul></ul>Establishment of limited-life, specialised asset management companies (AMCs)
  4. 4. AMCs tactical goal was to restructure NPLs and contribute to the broader strategic aims of financial and macroeconomic stability Tactical <ul><li>To improve the quality of distressed assets </li></ul><ul><li>To preserve the value of the debtor’s business as a going concern if </li></ul><ul><ul><ul><li>The business is viable; and </li></ul></ul></ul><ul><ul><ul><li>Return to creditors can be maximized </li></ul></ul></ul>Strategic <ul><li>And more broadly, to prevent bank failures, stabilise the financial system and recover economic activity and growth </li></ul>
  5. 5. AMCs and similar specialised agencies proliferated throughout the region Source: IMF Financial Restrucuting Advisory Committee Financial Sector Restructuring Authority (FRA), Asset Management Corporation (for non-bank financial companies Corporate Debt Restructuring Advisory Committee Thailand Danamodal Danaharta Corporate Debt Restructuring Committee (CDRC) Malaysia Korea Deposit Insurance Corporation Korea Asset Management Corporation (KAMCO) Corporate Restructuring Co-ordination Committee (CRCC) Korea Indonesian Bank Restructuring Authority Indonesian Bank Restructuring Agency (IBRA) Jakarta Initiatve Indonesia Agency for bank recapitalisation Asset management company Voluntary corporate workout
  6. 6. Examples <ul><li>Improved bankruptcy proceedings and promoted new rescue legislation </li></ul><ul><li>Implemented workouts and corporate restructuring through debt-equity swaps and lending working capital </li></ul><ul><li>Promoted foreign participation and ownership in real estate and corporate restructuring </li></ul><ul><li>Put into practice new financial expertise: </li></ul><ul><ul><li>Worldwide marketing for distressed Korean assets; </li></ul></ul><ul><ul><li>Asset valuation technologies, </li></ul></ul><ul><ul><li>Structuring of financial transactions; </li></ul></ul><ul><ul><li>New financial instruments, such as mortgage and asset-backed securities, collateralised debt obligations </li></ul></ul>Korea’s KAMCO is considered among the region’s success stories
  7. 7. Examples (cont’d) <ul><li>Co-ordinated sales across a range of selling institutions </li></ul><ul><li>Focused on 58 suspended finance companies </li></ul><ul><li>Used various packaging approaches </li></ul><ul><li>Sales were reported as the largest one day sales in history </li></ul><ul><li>Implemented (with varying degrees of success) techniques aiming to increase prices </li></ul><ul><li>Effective mechanism to dispose of foreclosed assets </li></ul><ul><li>FRA experience prompted the adoption of new procedures by the MoJ Legal Execution Department </li></ul>Thailand FRA For the first time in Asia, AMCs and rapid disposition agencies, like FRA, have developed a culture for bulk sales
  8. 8. Asian AMCs, by and large, achieved their strategic goals <ul><li>Respected country specific challenges </li></ul><ul><li>Dealt with legal, institutional and structural shortcomings </li></ul><ul><li>Served as vehicle for reforms and financial innovation </li></ul><ul><li>Supported the involvement of the private sector </li></ul>
  9. 9. 2. Post-crisis measures averted financial system meltdown, but did not successfully address underlying behaviours and structural weaknesses
  10. 10. In implementing emergency measures and pursuing strategic goals, AMCs faced serious constraints and made choices <ul><li>Banks recapitalised but not reformed </li></ul><ul><li>Little restructuring of the debtors owning the transferred NPLs </li></ul><ul><li>Run by governments and potentially subject to interference </li></ul><ul><li>Still building expertise </li></ul><ul><li>Insufficient disciplines / incentives imposed on banks </li></ul><ul><li>Moral hazard </li></ul><ul><li>Limited period of operation </li></ul>Tactical compromises Institutional limitations of AMCs
  11. 11. At some point, failure to address these tactical, but critical issues can lead to another crisis <ul><li>Private estimates now place total NPLs in Asia at US$ 2 trillion, or nearly 30 % of the region’s annual GDP. </li></ul><ul><li>There might not be enough fiscal and monetary liquidity for governments to recapitalise the financial system </li></ul>
  12. 12. 3. There is a clear need to master fundamentals so crisis does not recur
  13. 13. To deal meaningfully with bad debt, AMCs need to master the basics Governance <ul><li>Independent oversight board with clear mandate </li></ul><ul><li>Defined and transparent procedures </li></ul><ul><li>Improved reporting standards </li></ul>Greater focus on restructuring <ul><li>The quality and speed of asset resolution is key </li></ul><ul><li>Taking ownership of NPLs and proactive managemen </li></ul><ul><li>Working with debtors to improve cash-flow of assets underlying NPLs </li></ul>Greater powers and institutional capabilities <ul><li>For example, power to separate bad management from </li></ul><ul><li>the debtor and to liquidate debtors, which cannot be </li></ul><ul><li>expeditiously restructured </li></ul><ul><li>Training, knowledge transfer </li></ul><ul><li>leadership </li></ul>
  14. 14. To deal meaningfully with bad debt, AMCs need to master the basics (cont’d) Incentives and disciplines for banks <ul><li>Enhanced accountability of banks and bank managers </li></ul><ul><li>Ensure banks put in place risk-analysis and credit management systems </li></ul><ul><li>Ultimate burden no longer transferable to AMCs </li></ul>Greater protection of creditor rights <ul><li>Credible liquidation procedures and efficient secured transaction processes </li></ul><ul><li>Triggers and incentives for insolvency </li></ul>AND Strong and credible regulators, free from political pressure
  15. 15. The state must actively involve itself <ul><li>Providing sound legal and regulatory framework </li></ul><ul><li>Where necessary, providing resources </li></ul><ul><li>Governance, accountability and transparency </li></ul><ul><li>Ensuring a role for the private sector </li></ul><ul><li>Political will is key </li></ul>
  16. 16. ANNEX
  17. 17. OECD and Insolvency <ul><li>The OECD is active in insolvency reform in Asia and Central / Eastern Europe since 1993. </li></ul><ul><li>OECD, in co-operation with APEC, AusAID and the government of Japan, established a Forum for Asian Insolvency Reform (FAIR) as a sustained policy dialogue platform for discussion and exchange of experience on insolvency reform. </li></ul><ul><li>The OECD participates in the World Bank Insolvency Initiative, aiming to identify principles and guidelines for sound insolvency systems. </li></ul>
  18. 18. The OECD Forum for Asian Insolvency Reform <ul><li>The FAIR was born of the 1997-1998 Asian financial crisis. </li></ul><ul><li>Private estimates now place total NPLs in Asia at US$ 2 trillion, or nearly 30 % of the region’s annual GDP. </li></ul><ul><li>In recognition of the challenges stemming from the enormous level of bad debt, FAIR shared goal is to take sound policy and to ground it in the situation and circumstances of each country of the region. </li></ul>
  19. 19. The OECD Forum for Asian Insolvency Reform (cont’d) <ul><li>The First FAIR (Bali, 2000) focused on recent developments and the role of the judiciary </li></ul><ul><li>The Second FAIR (Bangkok, 2002) discussed informal workouts and insolvency reforms in Thailand </li></ul><ul><li>The Third FAIR (Seoul, 10-11 November 2003) will examine the approaches to maximising value from distressed assets and NPLs </li></ul>
  20. 20. Founded in 1961 as a follow on to the Marshall Plan, the Organisation for Economic Co-operation and Development promotes international codes, guidelines and principles by which countries can make their economic systems compatible. OECD Member Countries and Co-operating Countries
  21. 21. For More Information on FAIR <ul><li> </li></ul><ul><li>[email_address] </li></ul>