Commission to present guidelines on 'toxic assets'

THE EUROPEAN Commission has pledged to present clear guidelines on how EU member states can remove “toxic assets” from the balance sheets of banks within two weeks.

Governments will retain flexibility over the method of dealing with bad debts, whether it is by establishing a so-called “bad bank” or an insurance scheme to cover losses. But they must ensure that any measures to restore the flow of credit do not disrupt the EU’s internal market, according to conclusions from yesterday’s EU finance ministers meeting.

“What we are pursuing through this treatment of impaired assets is to restore lending, the normal functioning of the credit market,” said economic and monetary affairs commissioner Joaquin Almunia.

Ministers signed up to a communique stating that a common and co-ordinated approach was required to deal with the issue of “toxic assets”, which are generally complex debt securities linked to the US subprime mortgage market. However, the toxic assets held on Irish banks’ balance sheets are generally linked to loans in the land and property market.

The key issues the guidelines will address are: establishing a correct and consistent approach to the valuation of toxic assets; ensuring that banks benefiting from such schemes should keep a portion of the risk; outlining some specific conditions related to bank management to limit moral hazards; providing full transparency over the assets selected; and ensuring close monitoring of the implementation of any measures.

“One of the biggest problems for the EU is agreeing how to value toxic assets . . . we haven’t solved that yet,” said German finance minister Peer Steinbrueck.

There is also no support for the creation of a single EU-wide “bad bank”, which could absorb the toxic assets of European banks.