The European Commission today urged a common, transparent approach for banks and governments to deal with impaired assets such as the mortgage-backed securities at the root of the credit crunch.
The executive arm of the 27-nation European Union, unveiled guidelines on how to deal with those assets - some of which have been dubbed "toxic assets" - to make sure foreseeable losses are disclosed and properly handled.
The guidelines leave up to governments how they choose to deal with such assets - for example by setting up "bad banks" or using and asset insurance schemes - but are aimed at ensuring that such schemes do not result in unfair competition.
"These guidelines will help member states deal with impaired assets on bank's balance sheets. If we don't face up to this issue then we risk prolonging this crisis with zombie banks that are incapable of performing a useful role in our economies," EU Internal Markets Commissioner Charlie McCreevy said.
Toxic assets are typically securitised products linked to the US subprime mortgage market that have become untradeable as homeowners defaulted on the underlying home loans.
Banks have been forced to write down billions of euros in losses on such assets. Anticipation of more hidden losses to come has frozen lending among banks and sent investors in the sector sprinting for the exits.
The Commission's guidelines provide ways of valuing the assets, adequate remuneration in case of any state support, and cover ways in which governments could intervene.
The Commission said approval for asset relief measures would be granted for a period of six months, and conditional on the commitment to present details of the valuation of the assets.
Other measures proposed by the Commission include a coordinated approach to identify assets eligible for relief measures through the development of eligible categories of assets; a coordinated approach to valuation of assets ex-ante, based on common principles such as valuation based on real economic value rather than market value, implemented by independent experts and certified by bank supervisors; and adequate burden-sharing of the costs related to impaired asset between the shareholders, the creditors and the state.
The Commission has also suggested coverage of losses incurred from the valuation of the assets at real-economic-value by the bank benefiting from the scheme and management of assets subject to relief so as to avoid conflicts of interests.
Reuters