COMMISSION STAFF WORKING DOCUMENT AMC Blueprint Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL AND THE EUROPEAN CENTRAL BANK Second Progress Report on the Reduction of Non-Performing Loans in Europe
Date: 2018-03-14
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: EU banking union, action programme, bank, banking supervision, banking system, credit policy, economic recession, euro area, financial solvency, loan

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 14.3.2018  SWD(2018) 72 final  COMMISSION STAFF WORKING DOCUMENT AMC Blueprint Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL AND THE EUROPEAN CENTRAL BANK Second Progress Report on the Reduction of Non-Performing Loans in Europe   {COM(2018) 133 final}  
 
 
Table of Contents 

SUMMARY ......................................................................................................................................... 3 

I. 

INTRODUCTION ...................................................................................................................... 20 

II.  PRECONDITIONS FOR CENTRALISED AMCS ......................................................................... 22 

2.1.  Maximising the benefits and efficiency of AMCs .......................................................... 22 

2.2.  Commitment to comprehensive macro and structural reforms, as well as banking sector 

reforms ........................................................................................................................ 24 

2.3.  Considerations of financial stability and public funds at risk ......................................... 25 

III.  CONDITIONS FOR ASSET TRANSFER TO AMCS .................................................................... 26 

3.1.  Consistency with EU legal framework (bank resolution and State aid) .......................... 26 

3.2.  Needed diagnostics and critical mass of impaired assets ................................................ 39 

IV.  DESIGN AND SET-UP OF AN AMC .......................................................................................... 40 

4.1. 

Legislation, mandate and powers .................................................................................... 40 

4.2.  Ownership and governance, institutional independence ................................................. 42 

4.3.  Asset perimeter and size of the AMC.............................................................................. 43 

4.4.  Asset valuation principles and processes ........................................................................ 48 

4.5.  Accounting aspects .......................................................................................................... 52 
Accounting standards .............................................................................................. 52 
Specific aspects of accounting ................................................................................ 53 
Accounting related disclosures ................................................................................ 56 

4.5.1. 
4.5.2. 
4.5.3. 

4.6.  Data ................................................................................................................................. 56 
Need for harmonisation of data ............................................................................... 56 
Data needs ............................................................................................................... 57 
Data quality ............................................................................................................. 57 
Data sharing and transparency ................................................................................ 58 

4.6.1. 
4.6.2. 
4.6.3. 
4.6.4. 

4.7.  Conditions for bank participation .................................................................................... 59 

4.8. 

Funding ............................................................................................................................ 59 

4.9. 

Impact on public finances and national accounts ............................................................ 61 
4.9.1.  Main considerations for sector classification of AMC units ................................... 61 
Impact of losses related to impaired assets on government deficit and debt ........... 62 
4.9.2. 
Valuation of assets................................................................................................... 63 
4.9.3. 
Capital injections into banks and apportioned losses .............................................. 63 
4.9.4. 

4.10.  Safeguard mechanisms and supervision .......................................................................... 64 
4.10.1.  Safeguard mechanisms introduction ....................................................................... 64 
4.10.2.  Time-limit safeguards .............................................................................................. 64 
4.10.3.  Financial safeguards ................................................................................................ 64 
4.10.4.  Risk management safeguards .................................................................................. 65 
4.10.5.  Other safeguard mechanisms ................................................................................... 66 
4.10.6.  Supervision .............................................................................................................. 66 

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V.  EFFECTIVE OPERATIONS OF AN AMC .................................................................................. 66 

5.1.  Organisation and staffing, internal controls and transparency ........................................ 66 

5.2. 

Strategic planning, asset and financial management ....................................................... 67 
Strategic planning .................................................................................................... 67 
Asset and financial management ............................................................................. 70 

5.2.1. 
5.2.2. 

5.3. 

Interaction with transferring banks .................................................................................. 71 

5.4.  Options regarding loan servicing .................................................................................... 72 

5.5.  Closing the AMC ............................................................................................................ 73 

ANNEX:  OVERVIEW OF AID-FREE IMPAIRED ASSET RELIEF MEASURES ALTERNATIVE TO 
CENTRALISED AMCS ..................................................................................................................... 75 

NPL securitisation enabled by a market-conform State guarantee.............................................. 75 

Aid-free transfer of NPLs to a bank-specific AMC .................................................................... 77 

2 

 
 
 
SUMMARY  

Policy context 

The Council's "Action Plan To Tackle Non-Performing Loans In Europe" of 11 July 2017 
recognises  the  complementarity  of  necessary  actions  by  banks,  Member  States  and  the 
EU.  The  Action  Plan  invites  the  Commission  and  other  actors  to  take  steps  on  several 
fronts  to  tackle  both  the  legacy  stock  of  non-performing  loans  (NPLs)  and  the  risk  of 
build-up in the future. In order to achieve this, the Action Plan identifies four main areas 
where further action is needed to tackle NPLs:  

  supervisory policies;  
  structural reforms (enforcement and insolvency);  
 
the development of secondary markets for NPLs;  
  aiding the restructuring of banking systems. 

The  Action  Plan  also  invited  the  Commission  to  develop  a  Blueprint  for  national  Asset 
Management Companies (AMCs) by in close cooperation with other European institutions 
(i.e. the ECB, EBA and SRB).  

This  Blueprint,  drafted  by  Commission  services,  is  to  be  seen  in  the  context  of  the 
comprehensive  package  that  the  Commission  services  is  putting  forward  in  order  to 
address the four areas identified in the Action Plan and thereby fostering financial stability 
in the EU. The purpose of the Blueprint is to set out how an AMC can be set up on the 
basis of these principles; however other ways of designing and operating an AMC may be 
possible. 

This  package  will  enable  banks  and  Member  States  to  better  address  existing  NPLs  and 
avoid  excessive  build-up  of  NPLs  in  the  future.  The  package  is  an  essential  part  of  the 
Council's Action Plan. In combining several necessary initiatives, it creates the appropriate 
environment  for  dealing  with  NPLs  on  banks'  balance  sheets  and  reducing  the  risk  of 
future NPL accumulation. Their impact is expected to be different across Member States 
and  affected  institutions.  Some  will  have  a  stronger  impact  on  banks'  ex-ante  risk 
assessment at loan origination, some will foster swift recognition and better management 
of  NPLs,  and  others  will  enhance  the  market  value  of  such  NPLs.  These  initiatives 
mutually reinforce each other and would not be as effective if implemented in isolation. 

Historically,  AMCs  have  under  the  right  pre-conditions  been  an  important  part  of 
solutions to foster banks' stability. General lessons on how AMCs can be set up and how 
their  operations  can  be  run  in  an  effective  and  efficient  manner  can  be  learned  from 
historical examples, while keeping in mind that the legal framework has changed due the 
introduction  of  the  Bank  Recovery  and  Resolution  Directive  (BRRD)  and  the  Single 
Resolution Mechanism Regulation (SRMR). The main aim of AMCs has been to remove 
troubled assets from banks' balance sheets and thereby reduce the high uncertainty about 
the  quality  of  banks'  assets,  which  made  access  to  finance  very  difficult.  AMCs  thereby 
accelerated the restructuring of banks with high levels of distressed assets, stabilised the 
national  banking  sectors  at  large  and  eliminated  a  significant  impediment  to  the  flow  of 
new credit to the economy. 

3 

 
 
The  possible  use  of  AMCs  is  also  closely  linked  to  several  other  key  elements  of  the 
Action Plan, in particular: 

-  Further developing secondary markets for NPLs is important in order to enable banks 
to  better  manage  their  NPLs.  In  addition,  AMCs  might  significantly  benefit  from 
better  functioning  secondary  markets  as  one  way  by  which  an  AMC  maximises  the 
recovery value on its portfolio of NPLs is loan sales to third-party investors. Both the 
AMC and many potential end-investors would also be dependent on the availability 
of independent companies to service and manage the loans on their behalf. 

- 

In  its  review  of  the  Single  Supervisory  Mechanism  (SSM),  the  Commission  further 
clarified the powers of supervisors, i.e. that they have the power to make prudential 
adjustments  to  banks'  provisions  towards  losses  on  NPLs  on  a  case  by  case  basis.1 
Without such clear supervisory powers, weaker banks could set aside too few funds 
(i.e.  under-provision)  to  cover  the  expected  losses  on  their  NPLs,  and  pretend  that 
real losses have not materialised.  

-  Many  banks  also  have  to  enhance  the  management  of  their  NPLs.  They  have  to 
collect more accurate, undated and standardised data on their NPL holdings, for their 
own  management  purposes  and  provide  these  to  supervisors.  As  regards  data  on 
NPLs, the Commission is working with the EBA towards standardised data templates. 
The  EBA  NPL  Templates2  aim  to  fostering  transparency,  comparability  and  proper 
valuation of NPLs. This should help banks to manage their NPLs better and facilitate 
the transactions of  NPLs  between banks  and investors, including AMCs. Moreover, 
banks  that  have  adequately  written  down  the  value  of  their  NPLs  will  be  more 
inclined to sell them as they would not realise an accounting loss at the time of sale. 

Scope of the Blueprint 

The objective of this document is to provide practical guidance and recommendations for 
Member  States  when  considering  the  design  and  set-up  of  centralised  AMCs  at  the 
national level, building, where applicable, upon best practices from past experiences. The 
Blueprint therefore puts forward a number of non-binding principles, such as the relevant 
asset  perimeter,  the  participation  perimeter,  considerations  regarding  the  asset-size 
threshold, asset valuation rules, the appropriate capital structure, and the governance and 
operations of the AMC.  

AMCs  can  be  private  or  (partly)  publicly  funded  without  State  aid,  if  the  State  can  be 
considered to act as any other economic agent3. Setting up an AMC with State aid should 
not  be  seen as  the  default  option  and  will,  in  all  cases,  be  subject  to  all  applicable rules 
including  State  aid  rules,  the  Bank  Recovery  and  Resolution  Directive  (BRRD)  and  the 
Single Resolution Mechanism Regulation SRMR. The Blueprint clarifies the permissible 
design  for AMCs  supported  with  a  State  aid  element  that  can  be  used  as  an  exceptional 
solution.  Such  AMCs  will  remain  fully  consistent  with  the  EU  legal  framework, 
particularly the BRRD), SRMR and State aid rules.  

1 Art. 104 CRD and Art. 16 SSMR  
2 http://www.eba.europa.eu/risk-analysis-and-data/eba-work-on-npls  
3This, inter alia, would mean that any transactions take place at Estimated Market Value (EMV). 

4 

 
 
                                                            
A Member State's most effective measure to handle impaired assets depends on its specific 
situation,  including  the  size  of  the  problem,  the  concerned  asset  classes  and  banks'  own 
capacity  to  manage  and  work  out  NPLs.  A  centralised  AMC,  as  described  in  this 
Blueprint,  is  an  effective  measure  under  specific  circumstances,  namely  when  impaired 
assets affect a large part of the domestic banking system and mainly cover loans secured 
by commercial real estate and large corporate exposures (c.f. section 4.3). For these asset 
classes,  centralised  AMCs  may  enjoy  a  comparative  advantage  in  working  out  impaired 
loans.  Under  different  circumstances,  alternative  measures  may  be  more  suitable,  for 
instance  when  the  impaired  assets  constitute  a  very  large  share  of  the  total  assets  of  the 
banking  system  and  are  heterogeneous  in  nature.  Several  Member  States  have 
implemented such alternative measures with success in recent years. 

Notably, the share of banks with high NPL ratios, the composition of NPLs in a Member 
State’s banking system, and the capacity of the Member State to set up and, in the case of 
a  publicly  supported  AMC,  to  operate  and  (at  least  partially)  fund  it,  will  determine  an 
AMC's  capacity  to  achieve  economies  of  scale.  Such  considerations  will  influence  the 
AMCs ability to restructure distressed debt, and allow borrowers a path back to viability 
and  therefore  determine  whether  a  centralised  AMC  will  be  set  up  and  how  wide  its 
mandate  will  be.  Other  key  choices  concern  the  transfer  price  of  assets  and  the  AMC's 
funding and ownership structure, which play a critical role in its future success. 

Alternative  impaired  asset  measures  (IAMs)  may  include,  among  others,  bank-driven 
initiatives,  securitisation-based  approaches,  guarantees  or  asset  protection  schemes,  as 
well as ad-hoc AMCs common to one or a limited number of banks. 

Preconditions for centralised AMCs 

The design of a centralised AMC should follow the identified best practices, as set out in 
the  Blueprint.  Otherwise,  the  AMC  may  not  realise  its  potential  benefits  of  maximising 
recovery  values  and  foster  financial  stability  and  may  even  have  a  negative  impact  on 
financial stability and public finances. In the worst case, a loss-making AMC may have to 
be liquidated under the relevant corporate law, which could trigger the type of fire sale of 
assets that the AMC is intended to avoid. Similarly, the size of any asset removal scheme, 
including an AMC, and its riskiness will need to be limited for several reasons.  

In  general,  a  number  of  conditions  must  be  met  to  achieve  sufficient  benefits  and 
efficiency the AMC. To mitigate risks related to conflicts of interest and political pressure, 
sound  governance  standards  are  necessary.  Managers  and  administrators  must  fulfil 
strictly  defined  fit-and-proper  requirements.  Conflicts  of  interest  should  be  closely 
monitored and independence from political bodies must be ensured. 

Moreover, transferring assets is costly. Good documentation of loans and collaterals and 
active  cooperation  of  the  transferring  bank  can  greatly  facilitate  the  transfer  of  impaired 
assets and reduce costs. Therefore, the transactions should be structured in such a way that 
the incentives of the transferring bank are aligned with maximising recovery values. 

A prerequisite for the success of an AMC is its embedding in relevant structural reforms 
of the economy, the banking sector and relevant legal frameworks, in particular the ability 

5 

 
 
of the legal systems to enforce contracts and laws. European AMCs have in several cases 
been created within comprehensive macro-financial recovery programmes that included a 
set of structural reforms addressing weaknesses that were brought to the surface during the 
crisis. In  this regard, insolvency,  bankruptcy and foreclosure laws need to  be or become 
robust  in  order  to  ensure  that  the  AMC  and  prospective  asset  buyers  can  access  the 
collateral of insolvent debtors under fair terms and within a reasonable timeframe.4  

In order to make full use of an AMC, a Member State's banking sector may have to adjust 
in various ways. Hence, reforms of the banking sector should be initiated, including:  

  address the emergence of new NPLs, most notably by sound underwriting practices;  

  address  the  piling  up  of  already  existing  NPLs,  most  notably  by  sound  NPL 
management  frameworks,  as  addressed  by  the  ECB’s  NPL  guidance5,  and  timely 
provisioning/ write-off practices;  

  ensure  a  high  degree  of  transparency  and  data  availability  on  NPLs,  based  on  the 
EBA  data  templates,  to  support  other  NPL  workout  measures,  and  to  enhance 
market confidence more generally.6 

Conditions for asset transfer to an AMC 

Consistency with EU legal framework 

The  AMC  needs  to  be  set  up  and  operate  in  full  compliance  with  the  existing  EU  legal 
framework.  Practically  this  entails  that,  in  case  the  AMC  receives  public  support, 
compliance with State-aid rules, the BRRD and the SRMR has to be ensured. 

Under  the  EU's  bank  resolution  framework,  a  bank  requiring  extraordinary  public 
financial support – for instance to address a regulatory capital shortfall – may be declared 
"failing  or  likely  to  fail"  (FOLF)  by  the  competent  or  resolution  authority.  This  triggers 
either the bank's resolution (if considered in the public interest by the resolution authority) 
or,  alternatively,  its  liquidation  under  national  ordinary  insolvency  law.  Where  impaired 
asset aid granted in the context of a transfer of NPLs from a bank to a publicly-supported 
AMC constitutes extraordinary public financial support,7 a bank benefitting from such an 
IAM should thus in principle be resolved or liquidated. 

4 For the relevance of insolvency regimes, see for example J.-C. Bricongne (et al.): Macroeconomic Relevance of 
Insolvency Frameworks in a High-debt Context: An EU Perspective, ECFIN Discussion Papers 32, June 2016 
(https://ec.europa.eu/info/publications/economy-finance/macroeconomic-relevance-insolvency-frameworks-
high-debt-context-eu-perspective_en). Moreover, in the context of financial assistance programmes in EU 
Member States, structural reforms related to the banking sector, such as enhancing the judiciary capacity or out-
of-court settlements, have been inherent features of the programme design. References in this regard can be 
found in the respective programme documentation (https://ec.europa.eu/info/business-economy-euro/economic-
and-fiscal-policy-coordination/eu-financial-assistance_en). Aspects related to data transparency, alignment and 
granularity have recently gained more prominence within such structural reform elements, as reflected in the 
ECOFIN Action Plan on NPLs from July 2017. 

5 https://www.bankingsupervision.europa.eu/ecb/pub/pdf/guidance_on_npl.en.pdf 
6 http://www.eba.europa.eu/risk-analysis-and-data/eba-work-on-npls  
7 In accordance with Article 3(1)(29) SRMR and Article 2(1)(28) BRRD, ‘extraordinary public financial support’ 

means State aid within the meaning of Article 107(1) TFEU or any other public financial support at supra-
national level, which, if provided at national level, would constitute State aid, that is provided in order to 

6 

 
 
                                                            
 
However,  the  bank  resolution  framework  provides  for  an  exception  to  this  general 
principle that is relevant in context of NPL transfers to a publicly supported AMC, namely 
when  extraordinary  public  financial  support  is  needed  inter  alia  "to  remedy  a  serious 
disturbance in the economy of a Member State and to preserve financial stability". In case 
a "precautionary recapitalisation" is granted, a bank will not be considered FOLF. Neither 
resolution  nor  liquidation  under  national  ordinary  insolvency  proceedings  will  thus  be 
triggered. 

In the case of a publicly supported AMC, compliance with the applicable legal framework 
(i.e. State-aid rules, BRRD and SRMR) has  to be ensured regardless whether resolution, 
insolvency  proceedings  under  national  law  or,  in  exceptional  cases,  precautionary 
recapitalisation  is  employed.  If  the  AMC  buys  assets  at  a  price  exceeding  the  estimated 
market  value  (EMV),  the  transaction  involves  State  aid,  in  the  amount  of  the  difference 
between  the  actual  transfer  price  (TP)  and  the  EMV.  The  transaction  has  then  to  be 
approved by Commission before it can be implemented. A first condition for authorising 
such  aid  is  that  the  assets'  TP  cannot  exceed  their  real  economic  value  (REV).  Losses 
resulting  from  the  write-down  of  NPLs  from  their  net  book  value  to  the  transfer  price 
cannot be covered by the impaired asset aid. The valuation of impaired assets should be 
conducted by independent experts and validated by the competent authority based on the 
valuation provisions in the Communication.  

Any  impaired  asset  aid  to  a  going-concern  bank  must  comply  with  the  general 
requirements  applicable  to  restructuring  aid.  In  particular,  the  following  general 
requirements must be met before the aid is granted: 

 
 

 

restoring the bank's long-term viability;  
limiting  State  aid  to  the  minimum  necessary  through  burden-sharing  and  own 
contribution;  
limiting distortions of competition.  

Irrespective  of  whether  extraordinary  public  financial  support  is  granted  to  a  bank  in  a 
context  of  precautionary  recapitalisation,  resolution  or  liquidation  under  national 
insolvency proceedings, these general principles of the EU's State aid framework continue 
to be fully applicable, alongside the applicable bank resolution framework provisions. 

Considering  these  general  principles  of  the  EU's  State  aid  and  the  bank  resolution 
framework,  there  are  several  scenarios  of  transfers  of  NPLs  from  a  bank  to  a  publicly-
supported AMC, depending on the TP of the NPLs and the regulatory capital position of 
the  bank.  Each  scenario  implies  different  regulatory  conditions  and  consequences  and 
involves different relevant authorities: 
Scenario  1  -  No  State  aid:  When  a  publicly  supported  AMC  buys  NPLs  from  a  bank  at 
market  value,  it  acts  as  a  market  economy  operator  and,  thus,  provides  no  economic 
advantage to the ailing bank. Hence, neither State aid nor extraordinary public financial 

preserve or restore the viability, liquidity or solvency of an entity or of a group of which such an entity forms 
part. 

7 

 
 
                                                                                                                                                                                   
support is granted to the bank, and the measure is not subject to the EU's State aid and 
bank resolution framework. 

Scenario  2  -  Resolution:  In  the  context  of  resolution  of  a  bank,  the  use  of  the  asset 
separation tool (AST) requires the creation of an AMC. The purpose of such AMC is to 
separate selected assets from a bank’s balance sheet.  

Scenario  3  -  Insolvency  proceedings  under  national  law:  NPLs  are  transferred  in  the 
context of insolvency proceedings under national law. In this case, the standard practice 
would be to split the failed bank and perform an asset separation so that the "good" part 
can  be  sold,  provided  that  this  is  possible  under  the  national  insolvency  framework. 
Centralising the management of impaired assets in an AMC may increase efficiency in 
the  recovery  of  impaired  assets  sharing  common  characteristics.  State-aid  rules  allow 
Member States to facilitate the liquidation of an ailing bank under ordinary insolvency 
proceedings through State measures. Such liquidation aid can be considered compatible 
with the internal market to facilitate the exit of non-viable players in an orderly manner 
without endangering financial stability.  

Scenario  4  -  Precautionary  recapitalisation:  Precautionary  recapitalisation  is  a  form  of 
State  aid  that  can  be  given  under  exceptional  circumstances,  which,  provided  that  the 
conditions set out in Art. 32(4)(d)(iii) of the BRRD8 are complied with, does not trigger a 
"failing or likely to fail" (FOLF) determination for the bank. This tool is usually not used 
to support the transfer of NPLs to a publicly supported AMC but targeted at providing an 
extra  capital  buffer  to  a  bank  that  is  likely  to  become  distressed  if  economic  conditions 
were to worsen materially. The conditions for its application are therefore more general in 
nature. Nonetheless, precautionary recapitalisation can also be used in the specific case of 
a transfer of impaired assets to a publicly supported AMC, provided that it is ensured that 
such  transactions  pursue  the  same  objectives  as  capital  injections  and  that  the  specific 
State aid conditions for impaired asset measures (IAMs) are also respected. 

Diagnostic exercise 

The  general  purpose  of  a  diagnostic  exercise  is  to  help  determine  the  scope  of  banks 
transferring NPLs to an AMC, the assets to be transferred, and the terms and conditions 
under  the  applicable  EU  legal  frameworks  under  which  a  bank  can  transfer  assets  to  an 
AMC. Authorities should also use the diagnostic exercise to demonstrate that AMCs have 
an advantage over other NPL reduction measures for the entire banking system.  

If a transfer of a bank's NPLs to an AMC is to be (partially) financed with a precautionary 
recapitalisation  under  the  BRRD,  that  bank  should  first  participate  in  a  national  or  EU-
wide  asset  quality  review  (AQR),  stress  testing  or  similar  exercise.  EBA  guidelines 
provide further details on such exercise9, which needs to have the following features: 
-  a precise timeline; 

8 An analogous provision is contained in Article 18(4)(d)(iii) of the SRMR. Any reference to the BRRD provision 

in the remainder of the text should be interpreted also as a reference to the SRMR provision.  

9 Guidelines on the types of tests, reviews or exercises that may lead to support measures under Article 

32(4)(d)(iii) of the Bank Recovery and Resolution Directive, EBA/GL/2014/09. 

8 

 
 
                                                            
-  a predefined scope, including a sample of banks justified by economic or prudential 

reasons; 

-  a common reference date (i.e. the "cut-off" date for the balance sheet data used for the 

AQR/stress test); 

-  a  common  methodology,  including  a  range  of  hurdle  rates  and  a  common 

macroeconomic scenario;  

-  a quality assurance process, carried out by the relevant authorities. 

In the case of establishing an AMC supported by State aid10, the purpose of the diagnostic 
exercise  would  be  two-fold.  First,  it  should  help  the  authorities  to  determine  an 
appropriate  transfer  price,  which  typically  lies  between  the  (estimated)  market  value 
(EMV)  and  the  real  economic  value  (REV)  of  the  concerned  assets.11  Second,  it  should 
also inform the calibration of the potential related capital needs of the banks transferring 
assets to the AMC and the maximum amount of State aid that can be granted. Therefore, 
and in order to achieve clarity on the health of bank balance sheets, the diagnostic exercise 
should consist of an AQR and a stress test.  

The  AQR  does  not  have  to  cover  the  entire  balance  sheet  of  the  banks  subject  to  the 
diagnostic exercise. Rather, to maximise efficiency of the exercise, it could target a well-
identified part of assets that are likely to be separated and deconsolidated from the bank 
balance  sheets  through  the  transfer  to  an  AMC.  To  do  so,  the  type(s)  of  assets  that 
constitute the main source(s) of a bank's vulnerability must be well-known and captured 
within  the  scope  of  the  AQR.  The  entire  asset  perimeter  should  then  be  reviewed,  to 
identify  a  potential  misclassification  of  NPLs  and  remedy  the  related  provisioning 
shortfalls. Ideally, this should be carried out at the level of individual debtors, in order to 
maximise  the  usefulness  of  the  AQR  results  for  the  AMC.12  The  AQR  methodology 
should facilitate the Commission's estimation of the EMV and the REV of the concerned 
assets, so that the results can feed into the related valuation process. The result of the AQR 
should  serve  as  the  departure  point  for  the  macroeconomic  scenarios  employed  in  the 
stress test. 

The  stress  test  exercise  could  be  aligned  with  the  well-established  EU-wide  or  national 
stress  testing  exercises.  However,  the  regular  EU-wide  stress  test  exercise  is  only 
performed  periodically.  Alternatively,  and 
for 
methodological adjustment that would adapt the methodology better to the context of an 
AMC,  authorities  should  consider  running  a  parallel  stress  test  review  of  credit  risk  and 
NPL  valuations  under  adverse  economic  conditions.  This  review  could  use  the  adverse 

the  potential  need 

to  address 

10 I.e. an AMC that is partially or fully publicly-owned (or even privately-owned but with actions that are 

imputable to the State, or benefiting from a State guarantee), buying assets at a transfer price higher than the 
EMV. 

11 The AQR should hence detect misclassifications and provisioning gaps so that the bank's balance sheet can be 
restated in a 'clean' manner before application of the stress scenarios and authorities obtain more transparency 
on appropriate transfer prices. Losses which the bank has to book as a result of the AQR are to be considered as 
incurred losses. 

12 There are synergies between the AQR and future due diligence and strategic review by the AMC management, 
for example related to filling data gaps, understanding the past and current performance of the asset, updating 
the valuation of collateral, and analysing the legal position of the creditor. 

9 

 
 
                                                            
scenario  of  the  EU-wide  stress  test,  as  long  as  it  remains  relevant,  and  the  valuation 
models already established for the AQR. 

The  diagnostic  exercise  should  cover  either  the  entire  banking  system  of  the  Member 
State, or, where not practically possible due to the large number of banks, all banks above 
a predefined exposure to NPLs, expressed in absolute and relative terms. In case of a large 
number of smaller banks with a collectively significant NPL stock, the authorities should 
carry  out  the  diagnostic  exercise  on  a  representative  sample  of  loans,  covering  a  critical 
mass  of  relevant  NPL  portfolios.  Hence,  the  stress  test  exercise  should  in  this  case  be  a 
top-down exercise run by the authorities, taking into account resource constraints of these 
authorities, rather than applying a bottom-up approach, which is the case of the EU-wide 
stress testing exercises. 

The duration of this diagnostic exercise should be kept as short as possible. Nonetheless, 
based on past experience, the usual duration of an EU-wide stress test, from its launch to 
conclusion, stands at about 5 months. An AQR preceding the stress test will add at least 
two  months  to  the  process.  Hence,  a  diagnostic  exercise  covering  both  an  AQR  and  a 
stress test is likely to require 6 and 12 months to execute. 

Design and set-up of a centralised AMC 

The objectives, oversight, roles, functions and main design features of a centralised AMC 
must be based in legislation. To the extent that the AMC is set up in a resolution context, 
several elements in the existing framework on resolution (BRRD and SRMR) need to be 
complied with. If specific legislation is needed for the set-up of the AMC, it must take the 
specific AMC design into consideration and subsequently communicate this clearly.  

The AMC's mandate must be clear and unambiguous. Any secondary objectives should be 
avoided  unless  clearly  subordinated  to  its  primary  objectives.  Legislation  should  also 
contain strong oversight elements, which will ensure that the objectives of the AMC are 
disrupted and that the AMC’s operations are free of influence or lobbying. 

Following from design and financial stability considerations, legislation should ensure that 
the AMC is established as a one-off vehicle: the asset transfers should be completed in a 
single round, and there should be no further opportunities for asset transfers to the AMC 
thereafter,  outside  of  exceptional  circumstances.  Without  these  provisions,  risks  to  the 
objective of the AMC and to financial stability more broadly may emerge. 

Banks deemed by the diagnostic exercise to be in scope of transfer to the AMC may hence 
need  to  be  obliged  to  transfer  NPLs  falling  within  the  identified  asset  perimeter  to  the 
AMC.  Obliging  banks  via  national  legislation  to  transfer  NPLs  to  the  AMC  would 
encroach on their fundamental rights and would therefore need to be justified in the public 
interest (e.g. for financial stability purposes) and be proportional in nature. 

The  AMC  should  be  designed  with  the  objective  to  maximise  the  recovery  value  of  its 
assets.  The  AMC  should  therefore  aim  to  cover  its  costs.  If  it  would  be  able  to  make 
significant profits, this would imply that transfer prices of assets were too low, penalising 
banks  and,  potentially,  having  imposed  costs  on  tax  payers  associated  with  bank 
recapitalisations. Equally, an entity set up to make losses is not credible, not least from a 

10 

 
 
public finance perspective, which will demand that future loss expectations for the public 
sector, be minimised. The risk-taking of the AMC should be limited to the areas that are 
strictly related to the work-out of its assets.  

Furthermore, the AMC's legal toolkit must not be unduly restricted. In particular, it should 
be able to enforce collateral and take collateral on its own balance sheet, also with a view 
of  developing  its  assets  to  maximise  their  value.  The  AMC  should  be  free  to  liquidate 
assets that it had once considered viable, if that is justified by changed circumstances.  

The  AMC  should  not  be  granted  a  banking  license  or  an  asset  management  license. 
Granting a banking licence would subject the AMC to bank regulation and supervision as 
well  as  stricter  disclosure  requirements,  which  may  obstruct  the  discharge  of  its 
responsibilities.  

Regardless  whether  the  AMC  has  public  support  or  not,  it  should  operate  as  an 
independent legal entity, and not as a governmental agency. It should have full budgetary 
independence13  and  be  protected  from  political interference.  Managerial appointments  at 
the AMC should be merit-based and stay outside of political control, as the AMC requires 
highly  specialised  expertise  in  order  to  fulfil  its  mandate.  Being  run  as  a  private  sector 
entity, the AMC can demonstrate its distance from governmental and political influence. 
Greater flexibility in staffing, etc., can also be attained in this way. 

Asset perimeter and size 

The success of a centralised AMC critically hinges on its scope. A few principles are key 
for identifying, within a given market, the appropriate size and scope of such AMC: 

  Economies of scale and scope:  

o  As the main holder of a specific set of impaired assets in a banking system, AMCs 
can  achieve  specific  expertise  and  economies  of  scale  in  recovering  value  from 
specific assets. These, however, will be diminishing, as the number of assets and 
debtors increases. Historical experience also shows that significant economies of 
scope for various asset classes are rarely achievable for AMCs. 

o  Under  the  right  circumstances,  the  centralised  AMC  could  aim  at  taking  over  a 
large share of impaired assets of a certain asset class to achieve greater economies 
of scale. Financial constraints related to the size of the AMCs and/or the impact of 
the asset transfers on banks may justify choosing a narrower scope for the AMC. 
The AMC will nevertheless need to be sufficiently large to achieve the objectives 
of minimizing financial stability risks. 

  Maintaining critical size:  

o  Economies  of  scale  might  diminish  for  an  AMC  beyond  a  certain  size  and 
complexity. This would suggest that the centralised AMCs should have a critical 
minimum  size  while  not  being  too  large  relative  to  the  market  in  which  it 
operates. Furthermore, the transferred assets should not be overly diverse in their 

13 Budgetary independence is necessary to reduce the risk of political interference with the AMC’s operation via 

the threat of reductions in the AMC’s budget. 

11 

 
 
                                                            
nature. The centralised AMC should assume assets for which it has a comparative 
advantage in working out. 

o  The wider the asset scope, the larger the AMC may become. Controlling the size 
and perimeter of the AMC will mitigate a range of serious consequences, e.g. for 
fiscal  budgets,  as  well  as  funding  and  capitalisation  challenges  for  the  AMC. 
A larger  or  more  complex  entity  that  relies  on  government  guarantees  will  also 
create  a  larger  and/or  riskier  potential  contingent  liability  to  the  Member  State. 
Equally, an entity with a wider scope will be more difficult to manage and hence 
will have more difficulties realising efficient recovery values. Moreover the larger 
the  vehicle,  the  more  capital  it  will  require  at  set-up,  which  may  lead  to  issues, 
including from a public finance perspective.14 

Collateral  attached  to  the  assets  transferred  to  the  AMC  are  important,  as  they  can  help 
increase  the  recovery  value  from  NPLs  over  time.  In  a  crisis  the  value  of  collateral  is 
usually depressed, but it can recover with improving macroeconomic conditions. Without 
sufficient collateral, the AMC may achieve insufficient recoveries. Commercial real estate 
(CRE) assets offer relatively easier value recovery in this regard than residential real estate 
(RRE).  This  has  an  impact  on  the  suitability  of  these  assets  for  inclusion  in  AMCs. 
Realising collateral for RRE will be highly problematic due to legal, social and political 
realities.  Therefore,  the  AMC  should  only  in  exceptional  cases  be  considered  as  the 
instrument to do so. 

In  principal,  any  type  of  loan  can  be  transferred  to  an  AMC.  However,  past  experience 
suggests the following principles regarding asset transfer to the AMC: 

  Loans secured by commercial real estate (CRE)  can be transferred to the AMC - 
including those to small or medium-sized enterprises (SME), since they tend to have 
relatively  large  unit  sizes,  which  allows  the  AMC  to  maintain  a  relatively  light 
operation.  Moreover,  these  assets  have  a  strong  connection  with  real  assets  (often 
property). 

  Loans to large companies that are not secured by CRE can also be considered for 
transfer  to  the  AMC  since  they  exhibit  some  important  suitable  characteristics.  The 
exposures  are  often  relatively  large  and  are  therefore  relatively  cost-efficient  to 
manage  and  service  for  the  AMC.  Corporate  exposures  will  typically  be  large  and 
complex. Their complexity will require a high degree of work-out intensity; but these 
inherent costs can be outweighed by the return on working out large exposures. 

  Beyond these two primary categories, there is scope to consider other, residual, 
portfolios for transfer. Banks' own holdings of commercial or residential real estate 
have been successfully transferred to centralised AMCs in the past. In taking a debtor 
approach,  the  AMC  should  be  willing  to  accept  residual  portfolios  beyond  the 
perimeter outlined above, to ensure that all of a given’s debtors loans are captured. In 
this context, the AMC may also consider acquiring portfolios of non-performing buy-
to-let  mortgages.  Although  in  such  cases,  this  should  only  take  place  where  the 

14 If the AMC is classified as a defeasance structure and reflected as such in the national accounts, private equity 

will have to be raised; a large private equity portion will be more difficult to raise than a smaller one. 

12 

 
 
                                                            
legislation  underpinning  the  AMC  endows  it  with  sufficient  legal  powers  to 
effectively manage these loans. 

  Exceptions to these principles could be considered in highly specific contexts. It 
may  be  the  case  that  a  Member  State  identifies  highly  specific  cases  where  it  is 
desirable  to  transfer  other  asset  classes  to  the  AMC,  including,  for  example, 
residential real estate mortgages and SME loans. In general, these are unsuitable for 
AMC  workout,  but  highly  limited  transfers  could  be  considered  in  cases  where,  for 
example, the transfer would allow a bank to eliminate its exposure to a given business 
line or region, thereby aiding in its restructuring; where transfer would allow internal 
bank  workout  to  be  more  concentrated  on  other  exposures;  or  where  other,  highly 
evident synergies with the AMC could be identified.  

In order to reduce the risk that such exceptions are misused and threaten the viability 
of the AMC, strict criteria and limits must apply to such circumstances. In such cases, 
the value and the number of assets should not exceed 15% of total AMC assets. This 
exception  may  not  be  binding  where  the  debtor-level  approach  leads  to  a  higher 
proportion of other assets being transferred. The rationale for this limit is to prevent 
too  many  unsuitable  assets  being  transferred  to  the  AMC,  rendering  it  unduly 
burdened.  On  the  other  hand,  this  15%  envelope  allows  a  “debtor-level”  approach, 
i.e. the  complete  transfer  of  a  given  debtor's  exposures.  In  this  case,  however,  a 
significant  majority  of  the  transferred  assets  must  be  CRE-related  and/or  corporate 
loans, and exceed the minimum size thresholds, while not excluding residual transfers 
of other asset class exposures of the debtor. 

Other  asset  classes,  mainly  unsecured  retail  loans,  are  more  suitable  for  other  types  of 
impaired asset measures and should not be considered for transfer to the centralised AMC. 
The duration of these  loans  are often shorter, offering  less time for the AMC to  recover 
any  sufficient  value.  Furthermore,  they  have  the  dual  downside  of  potential  political 
interference  and  very  small  individual  loan  sizes  that  lead  to  high  complexity  and  costs 
related to servicing.  

A minimum size threshold for loans to be transferred to the AMC would usefully exclude 
small and granular exposures and retain only the more complex large-ticket exposures for 
the centralised AMC, for which the AMC has comparative advantages. These thresholds 
should be differentiated according to asset type, while taking into consideration the impact 
of the threshold on the total portion of assets affected. There should also be a minimum 
threshold at debtor level in order to avoid saddling the AMC with too many small debtors, 
which would strain its work-out capacity. The Blueprint proposes indicative levels of such 
thresholds in section 4.3: 

Asset valuation 

In the interest of sound management, it is crucial that transfer prices are set in a way that 
provides an optimal level of relief for the troubled bank while ensuring the AMC is able to 
recover  in  an  adequate  manner  all  costs  implied  by  its  operations.  In  a  stressed 
environment, it is likely that market values of impaired assets are significantly depressed. 

13 

 
 
If the AMC receives  State aid, these considerations are especially important  considering 
its potential impact on public finances. 

A transfer at market value would provide no capital relief to the troubled bank because it 
would crystallise high losses and erode its capital buffers, but could lead to the potential 
gains from the recovery of assets by the AMC later on. Instead, publicly-supported AMCs 
can intervene by purchasing troubled assets at a higher price than their market price (but 
not higher than the assets' real economic value (REV) and thus provide aid equalling the 
amount by which the transfer price exceeds the current market price. In this case, all future 
cash flows and costs generated by the management of the impaired assets should be taken 
into account in an adequate manner in the determination of the transfer price. 

Accounting aspects 

In case the AMC is a non-listed limited liability company without a banking license, it has 
to  prepare  and  publish  financial  statements  in  accordance  with  national  Generally 
Accepted  Accounting  Principles  [GAAP].  The  national  GAAP  must  be  aligned  with  the 
EU  accounting  Directive.  However,  Member  States  have  the  option  under  the  IAS 
Regulation  to  allow  or  require  the  use  of  EU-endorsed  IFRS  for  companies  or  public 
interest entities (including banks). If the AMC issues shares or debt securities on an EU 
regulated  market  it  must  use  IFRS  for  its  consolidated  accounts.  So,  the  applicable 
accounting framework for the preparation of financial statements by the AMC is either EU 
endorsed IFRS or national GAAP.15 

Within  the  limits  outlined  above,  and  depending  on  how  Member  States  have  exercised 
their  options,  the  applicable  accounting  framework  can  be  chosen  when  setting-up  the 
AMC. When exercising that choice, the objective of the AMC should be considered, i.e. to 
recover the long-term economic value of the assets over the specified term and to foster 
financial stability. In particular, the choice of the accounting framework should take into 
account  the risks  related  to  the  funding  structure  and  the associated  knock-on  effects  on 
the  willingness  of  private  investors  to  participate  in  the  ownership  structure.  A  higher 
relative use of fair value in the accounting framework could lead to more volatility of the 
P&L or capital than the use of historic cost combined with credit loss provisions. 

Even though there might be no legal requirement to prepare financial statements according 
to  IFRS,  AMCs  may  apply  EU  endorsed  IFRS  if  Member  States  have  allowed  that  for 
non-listed  companies.  The  application  of  IFRS  may  increase  transparency  for  the 
stakeholders  involved  in  the  AMC,  being  beneficial  especially  in  the  case  where  AMC 
bonds  are  placed  with  third-party  investors  without  the  protection  of  government 
guarantees.  The  current  common  use  of  IFRS  in  the  financial  sector  in  a  Member  State 
may be another argument for considering the use of IFRS. 

15 See the Commission’s homepage on financial reporting. For EU rules that limited liability companies have to 

follow when preparing financial statements see directive 2013/34/EU (“Accounting Directive”). 

14 

 
 
                                                            
Data  

Transferring banks should be required to run rigorous internal controls and quality checks 
to ensure that data provided to the AMC are as complete, accurate, reliable, consistent and 
timely  as  possible.  Banks  should  be  required  to  use  the  EBA  NPL  data  templates  at  an 
early stage and to comply with their validation rules before submitting data to the AMC. 

The AMC should perform a thorough data quality assurance before taking on new assets, 
based  on  the  EBA  data  templates  that  banks  should  use  prior  to  the  transfer.  Immediate 
necessary  actions  upon  establishment  of  the  AMC  include  data  collection  and  clearing, 
categorisation and prioritisation of assets and the setting up of specialised work-out teams. 
Furthermore, data cleansing processes are very important for correct asset pricing and for 
the sale process. In addition, a regular (i.e. bi-annual) quality assurance process is deemed 
necessary in order to secure minimum acceptable standards of data quality and ensure data 
relevance.  

After  transferring  the  assets,  AMCs  need  to  maintain  their  database  up-to-date.  When 
organising  loan  servicing,  they  need  to  ensure  access  to  all  necessary  information  to 
maintain the database up-to-date. 

In  addition  to  loan  data,  also  collateral  related  valuation  data  should  be  updated  on  an 
ongoing  basis.  If  there  are  no  liquid  markets  for  loans  or  collateral  values  available, 
valuation  updates  need  to  be  performed  at  least  annually.  This  will  enable  AMCs  to 
perform accurate and timely valuations. 

The AMC is expected to share its data with potential buyers / investors. For this purpose, 
it  should  use  the  relevant  EBA  NPL  templates  for  portfolio  screening  to  ensure 
consistency  across  market  participants.  A  clear  market  standard  based  on  the  EBA  NPL 
templates  will  help  to  widen  the  investor  pool.  Clear  rules  for  data  sharing  must  be  in 
place. Data storage will have to be done in a way that at no point in time any confidential 
data can be accessed by third parties. 

Funding 

The  AMC,  if  publically  supported,  would  ideally  acquire  assets  by  issuing  senior 
unsecured  bonds  to  transferring  banks.  The  senior  bonds  would  carry  a  full  and 
irrevocable guarantee of the national Treasury and would be eligible for use as collateral 
in Eurosystem credit operations by their holders. The bonds will be bullet securities with a 
call option available to the issuer. 

Market  funding  without  a  guarantee  should  be  explored  as  part  of  the  national  AMC 
design process and, if feasible, may be preferred over the government-guaranteed funding. 
However, historical experience indicates that such market-based solutions prove difficult 
to implement and may require a significantly larger equity contribution. 

The  senior  bonds  should  be  structured  against  the  background  of  cash  flow  uncertainty 
and liquidity risk. The AMC is expected to improve cash flow generation over time, as its 
recoveries tend to come late in its life cycle. However, the maturity of the bonds may need 

15 

 
 
to be shorter than the expected lifetime of the AMC, in order to minimise the total funding 
cost paid by the AMC.16  

While  the  large  majority  of  the  funding  should  consist  of  senior  guaranteed  bonds, 
subordinated  bonds  could  be  issued  and  placed  with  participating  banks  or  with  equity 
providers.  The  latter  is  preferable  as  it  would  fully  remove  exposure  to  the  transferred 
assets  from  the  transferring  banks  as  any  remaining  exposure  means  a  continued 
dependence  of  the  banks  on  NPL  performance.  The  equity  part  should  be  sufficient  to 
cover the expected Day 1 loss related to the initial recognition of assets at fair value and to 
provide a buffer that would allow the AMC to work out assets and carry out the necessary 
hedging  strategy  without  being  at  risk  of  falling  into  negative  equity.  Part  of  that  buffer 
could be structured as subordinated debt, for example calibrated to cover the unexpected 
loss on the assets. In the start-up period, the AMC may require a bridge loan to cover its 
initial  outlays  and  working  capital  needs.  This  could  be  provided  by  participating  banks 
against  state  guarantee,  and  repaid  once  the  AMC  generates  income.  The  government 
guarantee would need to be remunerated in line with the EU State aid rules.  

Appropriate controls must be put in place to ensure that AMC redeems senior debt, rather 
than  building  cash  reserves  or  diverting  resources  to  other  interests.  To  ensure  that  an 
AMC’s  overarching  goal  –  the  timely  wind  down  of  its  portfolio  –  is  achieved  and  not 
diverted,  strict  guidelines  should  be  laid  down  to  ensure  that  an  AMC  reduces  its 
outstanding liabilities at every reasonable opportunity. 

Impact on public finances and national accounts 

One of the key determinants of the fiscal impact of AMCs is their sector classification in 
national accounts. The choice is between S.12 (financial corporations) and S.13 (general 
government). AMCs would be classified as part of general government when they do not 
place  themselves  at  risk  and  instead  the  government  is  carrying  risks  and  rewards 
associated  with  asset  management  and  the  incurrence  of  liabilities  by  the  AMC.  The 
government  puts  itself  in  this  position  for  public  policy  purposes,  and  direct  or  indirect 
financial  support  received  by  such  AMCs  implies  a  redistribution  of  income  and  wealth 
through their operations, which justifies their classification inside general government. If 
such risks and rewards are instead predominantly with the banking sector, the AMC would 
be classified in the financial corporations sector. 

If an AMC is classified inside general government, its operations will be relevant for the 
'Maastricht  deficit'.  The  largest  impact  on  deficit  usually  relates  to  the  set-up  of  the 
structure and/or the transfer of the assets, if the value of cash provided by the government 
or the liabilities assumed by the government exceeds the market or fair value of the assets.  

If  the  AMC  is  classified  outside  general  government,  government  guarantees  on  the 
(realisation of the) assets could have an effect on public finances at inception. Government 
deficit and debt might also be affected in cases when an AMC is classified as a financial 

16 In the cases of SAREB and NAMA, the bonds have a contractual maturity of one year, and are rolled over on a 

periodic basis. 

16 

 
 
                                                            
corporation,  but  some  transactions  and  associated  liabilities  are  considered  as  done  or 
incurred on behalf of the government. 

Conversely,  if  the  AMC  is  classified  inside  general  government,  the  impact  on  debt  is 
more straightforward, due to the gross nature of the 'Maastricht debt': any obligation of an 
AMC  towards  units  outside  general  government  (e.g.  to  originating  banks)  that  has  a 
nature of deposit, debt security or loan will add to the government's 'Maastricht debt'.  

Units holding predominantly impaired assets (usually referred to as 'defeasance structures' 
in  statistical  methodology)  show  considerable  heterogeneity  as  regards  their  legal  and 
administrative  features,  forms  of  government  support,  size  and  origin/background.  It  is 
also clear that the national context and framework in which these entities are created differ 
considerably from one MS to another. It is therefore important that the statistical impact of 
each case is always separately analysed by the Commission (Eurostat). 

Safeguard mechanisms and supervision 

Safeguard mechanisms aim to protect the taxpayers against future liabilities created by an 
AMC.  Historically  such  mechanisms  have  been  more  important  in  countries  with  weak 
legal  and  institutional  environments,  especially  when  the  financial  sector  cannot 
thoroughly  assess  the  performance  of  an  AMC  or  weak  governance  is  predominant.  An 
AMC should consider implementing the following safeguard mechanisms: 
(1) Time limits: in order to ensure that the AMC acts expeditiously; 
(2) Financial: to avoid that an AMC becomes a fiscal burden; 
(3) Risk management: to ensure that prudent risk management practices; 
(4) Other safeguard mechanisms: to ensure best market practices are followed. 

There  may  be  a  trade-off  between  a  fully-fledged  implementation  of  safeguard 
mechanisms  and  the  effectiveness  of  an  AMC.  Therefore,  a  thorough  cost-benefit 
assessment should be performed before deciding on such safeguard mechanisms 

Supervision 

An AMC does not need to attract any deposits or issue new loans. Therefore, it does not 
require  a  banking  license  and  thereby  adhere  to  banking  supervisory  regulations.  The 
AMC would hence be considered neither as a credit institution, nor as an investment firm. 
It would subsequently not be subject to CRR/CRD supervision. 

However,  even  without  a  banking  license,  the  AMC  will  need  proper  oversight.  The 
appropriate  oversight  institution  would  need  to  be  identified  by  the  government  under 
whose jurisdiction the AMC would be set up. Entities which might be designated for this 
purpose  (in  the  following:  supervisor)  are  the  Competent  Authority  for  prudential 
supervision/resolution, the central bank, comptroller’s office / court of auditors or a joint 
oversight  committee  of  these  authorities.  In  addition,  if  public  funding  is  at  stake,  an 
observer function for the European authorities could be considered. 

17 

 
 
Effective operations in an AMC 

Organisation and staffing, internal controls and transparency 

An AMC should be able to hire and adjust staffing as needed during its lifetime. It should 
also  be  able  to  pay  market  price  for  specialised  skills  needed  in  the  work-out  process. 
Moreover, it should not aim to develop its own heavy servicing platforms, with a possible 
exception  for  single  large,  bespoke  exposures.  Rigorous,  best-practice,  internal  controls 
must be in place to secure the financial soundness of the AMC and to maintain the entities 
credibility. These controls should cover all relevant aspects of the AMCs governance and 
operations.  

AMCs  should  have  well-defined  disclosure  requirements  and  be,  more  broadly, 
transparent to the public. Transparency will be critical in the implementation phase, where 
it must be demonstrated that asset perimeters, participation perimeters and transfer pricing 
are rules-based and not subject to possible corruption or cronyism.  

Strategic planning, asset and financial management 

A  general  strategic  plan  should  be  designed  for  an  AMC’s  entire  life.  The  three  most 
important parts of a strategic plan are: 

  Setting an objective with the consideration of the mandate; 
  Selecting an approach for reaching the objectives and; 
  Assessing performance and reviewing the whole process (strategic plan review). 

The strategic plan should be set in multiple stages, preferably by defining the timespan of 
each stage. A clear performance measurement should be established, also in order to avoid 
the interference of external parties, especially as mechanisms against political interference. 
Performance  could  be  measured  by  considering  the  speed  of  disposal  and  the 
profit/recovery percentage, while appropriately considering the operating environment and 
social benefits. For each stage, a milestone should be set, ideally in form of a threshold of 
disposed  assets.  The  performance  of  the  AMC  should  be  assessed  regularly  in  order  to 
evaluate the adequacy of the strategic plan and effectiveness of its execution.  

Disposal strategies 

AMCs have a mix of disposal strategies available to them. The first step in defining the 
possible  spectre  of  solutions  is  identifying  the  viability  of  the  borrower  (either  going  or 
gone  concern).  Depending  on  the  nature  of  the  assets  managed,  the  urgency  of  cash 
generation, and their life span, AMCs can choose between five main disposal strategies: 

Insolvency proceeding and liquidation; 

-  Foreclosure and sale of collateral; 
- 
-  Sale of the loan; 
-  Restructuring (traditional, debt-to equity swap); 
-  Out-of-court arrangements (and quick recovery programmes). 

18 

 
 
Interaction with transferring banks 

To address moral hazard, banks need to share the potential losses of an AMC (at least in 
part). This should be achieved through banks being obliged to hold shares in the AMC.  

There should however be no interaction or clawbacks after the transfer in order to ensure 
an  effective  risk  transfer.  Solutions  that  include  clawbacks  or  requesting  participating 
banks  to  provide  collateral  would  create  several  problems  and  should  be  avoided.  Most 
notably either the clawback is inefficient, meaning the public funds remain exposed to a 
failure of the transferring bank, or the very purpose of the transfer of NPLs into the AMC 
is defeated. The bank would then remain exposed to further losses on the AMC portfolio, 
and  the  NPL  transfer  would  not  definitively  eliminate  the  risk  from  the  bank’s  balance 
sheet but merely shift it from the asset side to the liability side of the balance sheet.17  

Furthermore,  requesting  banks  to  provide  collateral  against  future  losses  would  raise 
issues in the context of the valuation of these assets and the market volatility at which the 
bank  would  expose  itself  or  the  assets  (if  listed).  Another  key  issue  with  clawback 
solutions is the governance and timing  regarding the valuation decision (with clawbacks 
legal risks would be increased). Hence, it should be a direct transfer taking the bank out of 
the decisions / activities post-transfer. 

Lastly, if possible, originating banks should not be involved in the servicing of the loans 
beyond a certain interim period, as they are faced with an inherent conflict of interest, to 
the degree that they are holding similar assets themselves. 

Closing the AMC 

The lifespan of the AMC should be finite, and defined in  its business plan. It should be 
realistic,  but  challenging,  to  reduce  room  for  complacency  and  intransigence,  and  to 
maintain  pressure  on  management  to  reduce  assets.  At  the  same  time,  an  AMC  should 
have some flexibility in its lifespan18, to react to emerging developments, to allow it fulfil 
its  primary  mandate  (maximisation  of  asset  values)  and  based  on  the  fundamental 
rationale of an AMC: to bridge intertemporal pricing gaps. Criteria for flexibly deviating 
from the planned lifespan should be set down out the outset of operations. 

Executive  incentives  should  be  provided  to  strengthen  the  determination  of  the  AMC’s 
management  to  meet  the  deadlines,  however,  without  creating  an  excessive  pressure  for 
asset  resolution  ahead  of  the  target.  A  not-for-profit  enterprise  may  aide  in  these 
incentives. 

The  legislation  should  not  provide  any  opportunities  to  refocus  the  AMC  towards  a 
different  business  model,  to  prolong  its  lifespan  beyond  what  is  strictly  necessary  to 
resolve  the  assets,  or  to  reopen  the  AMC  to  later  asset  transfers.  A  pre-determined 

17 See Martin Hellwig – March 2017 Carving out legacy assets: a successful tool for bank restructuring? 

(Scrutiny paper on the SRM provided at the request of the ECON)  

18 Subject to certain restrictions, i.e. no new business model and no prolongation beyond what is strictly necessary 

(see later on in this section). 

19 

 
 
                                                            
lifespan19  would  need  to  be  set  at  the  outset,  with  a  clear  and  measurable  path  towards 
wind-down, specified in the business plan, contingent upon reasonable assumptions about 
key parameters of baseline macroeconomic and asset recovery scenarios. 

19 The appropriate lifespan may differ depending on the type of assets and Member State specific context. 

Nevertheless, the pre-set, reasonable timespan also underlines that the value of the NPLs and the underlying 
collateral will only decrease over time. A macroeconomic recovery could deliver an uplift. However, waiting 
longer than, e.g., 10 years for such a recovery to take place is not sensible either, since by that time it is unlikely 
that the AMC would be able to retrieve the loss in recovery value. 

20 

 
 
 
 
                                                            
I. 

INTRODUCTION 

Historically,  and  especially  in  the  wake  of  the  financial  crisis,  asset  management 
companies (AMCs)  have  been  an important part of solutions to  clean up banks’ balance 
sheets in some Member States. For instance, in the case of Ireland and Spain, NAMA and 
SAREB were policy choices in the face of acute financial sector distress and were partly 
carried out in the context of resolution. General lessons on how AMCs can be set up and 
how their operations can be run in an effective and efficient manner can be learned from 
such  historical  instances,  while  keeping  in  mind  that  they  were  set  up  before  the 
introduction  of  the  Bank  Recovery  and  Resolution  Directive  (BRRD)  and  the  Single 
Resolution Mechanism Regulation (SRMR). The main aim of AMCs has been to remove 
troubled  assets  from  banks'  balance  sheets  and  reduce  related  uncertainty  premia,  to 
accelerate  the  restructuring  of  banks  with  high  levels  of  distressed  assets  and  thereby 
stabilise  the  national  banking  sectors  at  large.  AMCs  have  contributed  to  addressing 
financial stability concerns in countries with high levels of non-performing loans (NPLs) 
and  to  eliminating  a  significant  impediment  to  the  flow  of  new  credit  to  the  economy. 
Thanks  to  the  fact  that  national  banking  sectors  today  are  in  far  better  condition  (with 
decreasing  yet  still  large  NPL  stocks),  potential  positive  effects  from  a  systemic  NPL 
removal  are  likely  to  materialise  in  the  area  of  credit  extension  rather  than  financial 
stability. 

AMCs  can  also  act  as  a  catalyst  to  develop  secondary  markets  for  distressed  debt. 
However,  if  poorly  designed  and/or  managed,  AMCs  may  also  contribute  to  financial 
stability  risks,  including,  in  the  case  of  publicly  supported  or  guaranteed  vehicles, 
potentially reinforcing the so-called sovereign feedback loop. It is important to recognise 
that  such  undesired  and  adverse  consequences  would  bear  the  risk  of  undermining  a 
fundamental principle of the BRRD20 and of the SRMR21 that is breaking the link between 
private losses and public finances. Overall, past experience has demonstrated that AMCs 
attain  their  objectives  only  when  they  are  part  of  a  wider  and  comprehensive  strategy. 
Hence, AMCs should not and cannot be considered as a panacea. 

More specifically, AMCs can offer a variety of potential benefits to the financial system. 
They  procure  expertise,  can  benefit  from  economies  of  scale,  creditor  coordination  and 
they  provide  relief  to  affected  banks  that  are  struggling  to  manage  their  NPLs  and  aid 
them to re-focus on lending to viable firms and households. They also help to bridge the 
intertemporal valuation gap which is necessary to adopt structural reforms that take hold 
and  hence  improve  the  price  of  NPLs  in  secondary  markets.  However,  there  are  also 
limitations and costs associated with setting up AMCs. For instance, the transfer of loans 

20 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework 

for the recovery and resolution of credit institutions and investment firms and amending Council Directive 
82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 
2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European 
Parliament and of the Council, OJ L 173, 12.6.2014, p. 190. 

21 Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing 

uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in 
the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) 
No 1093/2010, OJ L225, 30.7.2014, p.1. 

21 

 
 
                                                            
to AMCs can involve a loss of information on the debtor, which can hinder restructuring 
and  delay  recoveries.  In  addition,  protracted  discussions  on  the  potential  set-up  of  an 
AMC  could  discourage  the  banks  to  take  swift  and  necessary  actions  themselves. 
Furthermore,  other  issues  that  should  be  kept  in  mind  and  carefully  considered  include: 
set-up  costs,  the  potential  need  for  new  capital  to  be  raised  by  transferring  banks,  the 
capital requirements for the AMC itself, etc. 

The objective of this blueprint is to provide practical guidelines for the design and set-up 
of  AMCs  at  a  national  level,  building  upon  best  practices  from  past  experiences.  AMCs 
can  be  private  or  (partly)  publicly  funded  with  no  need  of  State  aid  if  the  State  can  be 
considered to act in a similar way as a market economy operator would. The option of an 
AMC involving State aid should not be seen as the default solution since AMCs can take 
multiple forms and can be structured and financed in several ways. Considering the setting 
up  of  state-supported  AMCs  with  a  State  aid  element  as  an  exceptional  solution,  this 
blueprint clarifies key success factors and the permissible design for such state-sponsored 
AMCs, consistent with the EU legislative framework, particularly the BRRD and SRMR, 
which are fully in force and aim at limiting government interventions, and State aid rules. 

The  context  in  which  impaired  asset  problems  emerge  can  vary  significantly.  Impaired 
assets can be the result of a specific macro-financial stress concerning a limited number of 
asset types (e.g. real estate bubble driven by excessive lending growth), or gradually build 
up during generalised long and/or deep recessions undermining the capacity to repay of a 
wide  span  of  borrowers  and  thereby  affecting  the  quality  of  a  broad  range  of  assets. 
Impaired  assets  can  also  result  from  deficiencies  in  loan  origination  practices  or  risk 
management.  The  presence  of  substantial  stocks  of  impaired  assets  on  banks'  balance 
sheets can raise uncertainty regarding their valuation, which could undermine confidence 
in  the  concerned  banks,  threaten  financial  stability  and  hamper  bank  lending  to  the  real 
economy. In such circumstances, reducing the NPL stock in the banking system becomes 
a  public  policy  objective  to  put  distressed  banks  once  again  on  a  stronger  and  healthier 
footing. 

As  recent  history  shows,  for  the  banks  that  fail  to  restore  their  financial  health  through 
market  mechanisms,  the  public  policy  response  can  be  translated  into  a  wide  variety  of 
impaired  asset  measures,  which  themselves  need  to  be  embedded  in  a  broad  and 
comprehensive strategy (see section 2.2 for more details). A Member State's choice of the 
most  effective  impaired  asset  measure  depends  on  its  specific  situation  and  primarily 
hinges on the pervasiveness of the problem within the domestic banking sector, the asset 
classes that are concerned, and banks' own capacity to manage and work out NPLs.  

A centralised AMC, which is the focus of the present blueprint, is a very effective measure 
in specific circumstances, namely when impaired assets affect a large part of the domestic 
banking  system  and  mainly  cover  loans  secured  by  commercial  real  estate  and  large 
corporate  exposures  (section  4.3).  These  asset  classes  AMCs  enjoy  a  comparative 
advantage  in  working  out  impaired  loans.  If  these  circumstances  are  not  present  (for 
instance  when  the  banking  system's  impaired  assets  are  very  heterogeneous),  alternative 
impaired  asset  measures  may  be  more  appropriate  and  have  been  implemented  with 
success in recent years by various Member States.  

22 

 
 
Alternative  impaired  asset  measures  may  include,  among  others,  bank-driven  initiatives, 
securitisation-based approaches, guarantees or asset protection schemes as well as ad-hoc 
AMCs  common  to  one  or  a  limited  number  of  banks.  Furthermore,  various  types  of 
interventions can complement each other, thereby allowing for tailored approaches to the 
specific impaired asset situation, which a Member State is confronted with. 

Figure 1: Example decision tree for authorities in the face of a NPL crisis  

Source: Commission Services (DG COMP) 

The  Blueprint  has  been  developed  by  the  Commission  in  close  cooperation  with  all 
relevant  institutions,  i.e.  the  ECB/SSM,  EBA  and  SRB.  It  puts  forward  a  number  of 
common  principles,  such  as  the  relevant  asset  perimeter,  the  participation  perimeter, 
considerations  regarding  the  asset-size  threshold,  asset  valuation  rules,  the  appropriate 
capital structure, and the governance and operations of the AMC. 

II.  PRECONDITIONS FOR CENTRALISED AMCS 

2.1.  Maximising the benefits and efficiency of AMCs 

There  are  a  number  of  conditions  that,  if  fulfilled,  can  maximise  the  usefulness  and  the 
efficiency  of  AMCs.  AMCs  are  most  useful  when  banks  due  to  internal  or  external 
constraints lack the capacity to deal with impaired assets on their own. An AMC has the 
potential to pool exposures from distressed debtors and therefore make management more 
effective and efficient. It could also centralize scarce human resources and expertise and 
can therefore often handle and work out NPLs better than embattled banks that may suffer 
from weak management and poor credit policies. This  should not  prevent  banks that are 

23 

 
 
 
failing or likely to fail (FOLF) from being liquidated or resolved under the BRRD, which 
provides  for  an  efficient  framework  enabling  market  exit  of  troubled  banks  while 
minimising costs to the taxpayer and negative repercussions to the economy.  

A  careful  design  of  the  AMC  and  of  its  mandate  is  crucial  to  ensure  its  success.  The 
choice  of  one  centralised  AMC  vs.  numerous  decentralised  AMCs  in  a  Member  State, 
with a wide vs. narrow mandate, is closely linked to the number of banks with high NPL 
ratios and the composition of the NPLs in the system, the capacity to achieve economies 
of  scale  and  the  possibility  to  restructure  distressed  borrowers  back  to  viability.  Other 
fundamental  choices  regarding  the  transfer  price  and  the  AMC's  funding  and  ownership 
also play a critical role in its future success and need to be carefully reflected upon. 

Under  a  decentralized  approach,  NPLs  are  left  with  the  individual  bank  to  deal  with, 
whereas  the  centralized  approach  sees  NPLs  transferred  to  a  centrally  managed  AMC. 
Each  choice  has  its  distinct  advantages  and  disadvantages,  with  several  trade-offs  to  be 
carefully  considered.  For  instance,  having  one  very  large,  centralised  AMC  may  obtain 
economies  of  scale  but  could  also  become  unwieldy.22  This  could  potentially  hinder  the 
ability  to  react  swiftly,  e.g.  in  sales  transactions.  Conversely,  the  decentralised  AMC 
allows for a more customised approach. This would be more appropriate when the NPLs 
are  not  systemic  but  rather  isolated  and  bank-specific,  and  when  the  causes  are  not 
markedly shared by other banks in the system. 

The decision regarding the mandate of the AMC, be it either wide or narrow, depends on: 
(1) the size of the NPL problem in a given Member State; and (2) the state of the market. 
Especially  when  the  amount  of  NPLs  in  the  system  is  large  and  the  market  for  loans  is 
distressed, fire sales should be avoided. In such a case, the AMC should be endowed with 
a  wide  mandate,  enabling  the  AMC  to  collect,  restructure  and  dispose  of  participating 
banks'  impaired  assets  over  the  long  term,  hence  restoring  viability  of  these  banks  (e.g. 
SAREB, NAMA). Conversely, a narrow mandate is more appropriate when the amount of 
NPLs in the financial system is more limited, and when banks can be resolved and assets 
liquidated, taking away the need for a wide mandate (e.g. UKAR, Finansiel Stabilitet). 

In a centralised AMC, management practices and expertise may be weaker than in private 
structures, and conflicts of interest and political pressure can be more frequent, reducing 
the  efficiency  and  effectiveness  of  its  operations.  To  mitigate  these  risks,  sound 
governance  is  absolutely  necessary:  managers  and  administrators  must  fulfil  strictly 
defined fit-and-proper requirements, conflicts of interest should be closely monitored and 
independence  from  political  bodies  must  be  ensured.  Managers'  remuneration  (including 
all kinds of advantages) need to be transparent and well-defined. Ideally, they should be 
performance based. 

Strong political will and a supportive legal framework are also instrumental in the success 
of an AMC. The design of the AMC and the transfer of impaired assets must strictly abide 

22 See section 4.3. 

24 

 
 
                                                            
by EU regulation, in particular the bank resolution framework (BRRD/SRMR) and State 
aid rules.23 

Finally, transferring  assets is costly and harms business continuity.  Good documentation 
of loans and collaterals as well as active collaboration of the staff handling the impaired 
assets in the banks can greatly facilitate the transfer and reduce the costs. Therefore, the 
transactions  should  be  structured  in  such  a  way  so  as  to  keep  the  transferring  bank's 
incentives aligned with maximising recovery values.  

2.2.  Commitment to comprehensive macro and structural reforms, as well as 

banking sector reforms 

A  vital  prerequisite  for  the  success  of  an  AMC  is  its  alignment  with  relevant  structural 
reforms. This is because the investors' pricing of the assets includes risk premia linked to 
enforcement  prospects, which  can  be  addressed by  policymakers.  European  AMCs  were 
often created within comprehensive macro-financial recovery programmes that included a 
set  of  structural  reforms  with  a  view  to  address  weaknesses  that  were  brought  to  the 
surface in the course of the crisis. In this regard, insolvency, bankruptcy and foreclosure 
laws need to be robust in order to ensure that the AMC as well as prospective asset buyers 
can  access  insolvent  debtors’  collateral  under  fair  terms  and  within  a  reasonable 
timeframe.24  Moreover,  a  variety  of  restructuring  models  should  be  readily  available  for 
cases where further active engagement with the debtor would ultimately increase the asset 
value  more  than  a  collateral  sale.  This  is  especially  important  in  the  context  of 
safeguarding  viable  but  indebted  businesses.  Experience  shows  that  the  success  of  an 
adjustment  programme  –  and  hence  also  the  price  recovery  of  the  distressed  financial 
assets  –  can  rarely  be  expected  unless  investors  are  sufficiently  convinced  by  the 
authorities' ability to adopt and implement appropriate measures. 

In the context of the use of an AMC there might be a need for important changes in the 
banking  sector  regarding  many  dimensions,  such  as  banks'  loan  origination  practices, 
monitoring,  cost  efficiency,  disclosure  and  internal  governance.  In  this  respect,  different 
types of banking sector reform initiatives that should be undertaken include:  

  preventive  measures  addressing  the  emergence  of  NPLs,  most  notably  sound 

underwriting practices;  

23 See section 3.1. 
24 For the relevance of structural elements such as insolvency regimes see for example J.-C. Bricongne (et al.): 
Macroeconomic Relevance of Insolvency Frameworks in a High-debt Context: An EU Perspective, ECFIN 
Discussion Papers 32, June 2016 (https://ec.europa.eu/info/publications/economy-finance/macroeconomic-
relevance-insolvency-frameworks-high-debt-context-eu-perspective_en). Moreover, in the context of financial 
assistance programmes in EU Member States, structural reforms related to the banking sector, such as 
enhancing the judiciary capacity or out-of-court settlements, have been an inherent feature of the programme 
design. References in this regard can be found in the respective programme documentation 
(https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-
assistance_en). Aspects related to data transparency, alignment and granularity have recently gained more 
prominence within such structural reform elements, as reflected in the ECOFIN Action Plan on NPLs from July 
2017. 

25 

 
 
                                                            
  measures addressing the piling up of already existing NPLs, most notably sound 
NPL  management  frameworks,  as  addressed  by  ECB’s  NPL  guidance25,  and 
timely provisioning/ write-off practices;  

  high  degree  of  transparency  and  NPL  data  availability  to  support  other  NPL 

workout measures and to enhance market confidence more generally. 

Finally, it is important that banks have adequate credit risk management practices in place. 
NPLs may be a by-product to bank lending and cannot be fully avoided. Nevertheless, one 
of the most important lessons learnt from past crises is the need for banks to implement 
sound underwriting standards and practices. Some banks' lending and monitoring practices 
and strategies before the financial crisis were one of the key drivers of the ex-ante build-
up  of  the  high  stock  of  NPLs  in  a  number  of  Member  States.  National  Authorities  will 
therefore need to make sure that loan origination standards are set to prevent the build-up 
of high levels of new NPLs in the future.26 

2.3.  Considerations of financial stability and public funds at risk 

The case for any AMC rests on the ability of the AMC to achieve higher recovery rates 
over its lifetime than the participating banks would do on their own and on remedying a 
significant threat to financial stability. The former justification informs the choice of the 
eligible  assets  to  be  transferred  to  the  AMC  and  the  participation  perimeter.  The  latter, 
however,  goes  beyond  operational  and  managerial  considerations.  Traditionally, 
centralised  AMCs  have  been  a  part  of  a  comprehensive  policy  response  to  an  acute 
solvency  and  liquidity  distress  affecting  entire  national  banking  sectors.  That  context, 
arguably, is less relevant currently. 

The design of the AMC should follow the identified best practices, as set out throughout 
this Blueprint. Otherwise, the AMC may have a negative impact on financial stability and 
public  finances.  As  an  example  of  pitfalls,  an  undercapitalised  AMC  may  have  an 
incentive to extend short-term forbearance to non-viable debtors, which in the longer run 
would  be  destructive  to  sound  borrowers  and  may  also  lead  to  losses  within  the  AMC 
itself. In the worst case, a loss-making AMC may have to be liquidated under the relevant 
corporate  law,  which  would  trigger  the  fire  sale  that  the  AMC  is  precisely  intended  to 
avoid.  Similarly,  the  size  of  any  asset  removal  scheme,  including  an  AMC,  and  its 
riskiness will need to be limited for several reasons.  

In  the  case  of  a  publicly  supported  AMC,  compliance  with  the  current  legal  framework 
(i.e. the BRRD and the SRMR) has to be ensured. In particular, capital shortfalls that may 
arise in banks whose assets have been transferred to an AMC as a result of this transfer at 
a price not exceeding the assets' real economic value (REV), i.e. in most cases below the 
current carrying value, will qualify as extraordinary public financial support and, will in 
principle,  trigger  the  determination  that  the  bank  is  FOLF.27  Furthermore,  the  scale  of  a 

25 https://www.bankingsupervision.europa.eu/ecb/pub/pdf/guidance_on_npl.en.pdf  
26 Banks (and national authorities) should adhere to the upcoming EBA Guidelines on Loan Origination. 
27 See section 3.1. 

26 

 
 
                                                            
publicly supported AMC must be limited to mitigate liabilities of the State. From a public 
finance  perspective,  if  the  AMC  was  to  be  state-controlled  and  classified  in  the  general 
government  sector,  the  capacity  of  the  state  to  absorb  the  increase  in  public  debt  would 
have  to  be  assessed,  along  with  the  need  to  provide  adequate  capital  for  the  vehicle  to 
operate.  In  addition,  second-round  effects  may  need  to  be  considered,  including  the 
potential  for  later  recapitalisation  needs  for  the  AMC  or  even  the  banking  sector  in 
adverse  conditions,  although  appropriate  design28  and  implementation  principles  should 
help mitigate this risk. The impact of contingent liabilities not just on public finances, but 
also on perceptions of sovereign creditworthiness should also be assessed, in light of the 
potential for negative sovereign-bank feedback loops to emerge. 

A  majority  or  fully  privately-controlled  AMC  may  be  classified  outside  the  government 
sector, and would therefore not result in an increase in government debt, provided that a 
number of conditions are met.29 A privately-controlled AMC may limit the upfront costs 
of  the  AMC  to  the  state,  particularly  when  combined  with  an  appropriate  funding 
scheme.30 However, a number of challenges arise in achieving such status, stemming from 
the size of the entity. The vehicle will have to be adequately capitalised in order to ensure 
that  any  losses  incurred  by  the  AMC  will  not  ultimately  have  to  be  borne  by  the  state. 
When  public  funding  or  guarantees  are  involved,  the  ESA  2010  provisions  need  to  be 
borne  in  mind.31  Finally,  while  a  privately-controlled  AMC  may  have  desirable  features, 
insofar  as  its  liabilities  are  guaranteed,  a  publicly  supported  AMC  may  remain  a 
contingent  liability  of  the  state  and  adverse  developments  could  under  certain 
circumstances have an impact on its status. This again raises the discussion on size, as a 
very large entity relative to the state may pose risks, perceived or otherwise. 

III.  CONDITIONS FOR ASSET TRANSFER TO AMCS 

3.1.  Consistency with EU legal framework (bank resolution and State aid) 

Applicable regulatory frameworks 

AMCs need to be fully compliant with the existing EU legal framework. Practically this 
entails that, in the case the AMC receives public support, compliance with State-aid rules, 
the BRRD and the SRMR has to be ensured. A transfer of NPLs by a bank to a publicly-
supported AMC is, as noted above, subject to two EU regulatory frameworks: 

 

 

the bank resolution framework, consisting of the BRRD and the SRMR. 

the  State  aid  framework,  under  which  at  present  aid  to  banks  can  be  considered 
compatible with the internal market32, if the aid complies with the provisions of a 
number of successively developed Crisis Communications. 

28 See sections 3.2. and 4.3. 
29 See section 4.9. 
30 See section 4.8. 
31 See section 4.9 
32 Based on Art. 107(3)(b) TFEU 

27 

 
 
                                                            
General principles of the bank resolution framework 

Under  the  EU's  bank  resolution  framework,  a  bank  requiring  extraordinary  public 
financial support – for instance to address a regulatory capital shortfall – may be declared 
"failing  or  likely  to  fail"  (FOLF)  by  the  competent  or  resolution  authority.  This  triggers 
either the bank's resolution (if considered in the public interest by the resolution authority) 
or,  alternatively,  its  liquidation  under  national  ordinary  insolvency  proceedings.  Where 
impaired asset aid granted in the context of a transfer of NPLs from a bank to a publicly-
supported  AMC  qualifies  as  extraordinary  public  financial  support33,  a  bank  benefitting 
from such an IAM should thus in principle be resolved or liquidated. 

However,  the  bank  resolution  framework  provides  for  an  exception  to  this  general 
principle  which  is  relevant  in  context  of  NPL  transfers  to  a  publicly-supported  AMC, 
namely  when  extraordinary  public  financial  support  is  needed  inter  alia  "to  remedy  a 
serious disturbance in the economy of a Member State and to preserve financial stability", 
whereby the support takes the form of "an injection of own funds or purchase of capital 
instruments"  and  a  number  of  further  specific  conditions  (further  discussed  below)  are 
met.34  If  all  conditions  for  a  "precautionary  recapitalisation"  are  met,  a  bank  will  not  be 
considered  FOLF.  Neither  resolution  nor  liquidation  under  national  ordinary  insolvency 
proceedings is thus triggered. 

Irrespective  of  whether  extraordinary  public  financial  support  is  granted  to  a  bank  in  a 
context  of  precautionary  recapitalisation,  resolution  or  liquidation  under  national 
insolvency  proceedings,  the  general  principles  of  the  EU's  State  aid  framework,  as 
outlined  above,  continue  to  be  fully  applicable,  alongside  the  applicable  bank  resolution 
framework provisions. 

General principles of the State aid framework 

Under the EU Treaty on the Functioning of the EU (TFEU), State aid can be granted only 
after it has been authorised by the Commission. The first question when confronted with a 
transfer of impaired assets to a publicly-supported AMC is therefore to verify whether it 
contains State aid or not.  

If  the  impaired  assets  are  bought  by  the  publicly-supported  AMC  at  the  assets'  market 
price – i.e. the price which private investors would pay at the same moment for the same 
assets – the transaction (impaired asset measure or IAM) does not involve State aid, and 
State aid rules are hence not applicable. As often the assets at stake are not traded and their 
price can therefore not be directly observed, the market price has to be estimated based on 
observable  transactions  for  similar  types  of  assets,  yielding  the  Estimated  Market  Value 
(EMV). 

33 In accordance with Article 3(1)(29) SRMR and Article 2(1)(28) BRRD, ‘extraordinary public financial 

support’ means State aid within the meaning of Article 107(1) TFEU or any other public financial support at 
supra-national level, which, if provided at national level, would constitute State aid, that is provided in order to 
preserve or restore the viability, liquidity or solvency of an entity or of a group of which such an entity forms 
part. 

34 See Article 32 (4)(d)(iii) BRRD and Article 18 (4)(d)(iii) SRMR. 

28 

 
 
                                                            
If the assets are bought by the AMC at a price exceeding the  EMV, then the transaction 
involves State aid, which amounts to the difference between the actual transfer price (TP) 
and  the  EMV.  The  transaction  has then  to  be approved  by Commission  before  it  can  be 
implemented.  A  first  condition  for  authorising  such  aid,  which  is  laid  down  in  the 
Impaired  Asset  Communication  of  2009,  is  that  the  assets'  TP  cannot  exceed  the  said 
NPLs'  REV35.  Losses  resulting  from  the  write-down  of  NPLs  from  their  net  book  value 
(NBV)  (in the books of  the transferring bank) up to  the TP  are  to  be borne by the bank 
(i.e. by  private  means)  and  are  not  covered  by  the  impaired  asset  aid.  The  valuation  of 
impaired  assets  should  be  conducted  by  independent  experts  and  validated  by  the 
competent authority based on the valuation provisions in the Communication.  

Figure 2: Calculation of impaired asset aid under EU State aid rules 

Second,  any  impaired  asset  aid  to  a  going-concern  bank  must  comply  with  the  general 
requirements  applicable  to  restructuring  aid,  laid  down  in  the  Commission's  Banking 
Communication of 2013 and the Restructuring Communication of 2009.  

In  particular,  the  following  general  requirements  must  be  met,  and  this before  the  aid  is 
granted: 
  Restoration of the bank's long-term viability: The Member State and the bank have to 
submit  and  implement  a  restructuring  plan  that  demonstrates  how  the  beneficiary 
bank's  long-term  viability  will  be  restored  and  how  the  IAM  in  question  is  both 
necessary and sufficient to achieve this goal.36 

  Limiting  State  aid  to  the  minimum  necessary  through  burden-sharing  and  own 
contribution: First, the bank must try to finance the restructuring costs with its own 

35 Cf. section 4.4. for further details. 
36 In a situation where over a short period of time a relatively large number of small banks in the same Member 
State would need to receive State aid, the Commission services could exceptionally consider determining and 
using a set of ex ante criteria to assess the banks' viability (e.g. certain efficiency ratios, cost of funding, etc.). 
Furthermore, the Commission services could in such a situation ensure a structured and proportionate approach 
in assessing the restructuring plans, in line with the Commission's case practice and guidelines. Finally, in view 
of the greater potential distortion of competition the use of ex ante criteria for larger banks cannot be accepted. 

29 

 
 
 
                                                            
resources as much as possible. Therefore, the bank's restructuring plan should contain 
cost-cutting measures and propose the sale of non-core activities. In addition, the aid 
can only be authorised if shareholders and junior debtholders have contributed to the 
bank's  losses  first.  In  practice,  this  means  that  shareholders  are  written  down  or 
diluted while junior debtholders are converted (to equity) and/or written down. 

  Limiting distortions of competition: Measures must be taken to mitigate competition 
distortions  arising  as  a  result  of  the IAM.  The  nature  and  form  of  such  measures  is 
dependent on the aid amount, the circumstances under which the aid was granted and 
the  characteristics  of  the  market(s)  where  the  beneficiary  bank  operates.  The 
measures  typically  include  structural  measures,  behavioural  measures  and  market-
opening measures. 

Possible scenarios 

Considering  both  the  general  principles  of  the  EU's  State  aid  and  bank  resolution 
framework, a number of scenarios in which a bank transfers NPLs to a publicly-supported 
AMC  can  be  conceived  in  function  of  the  TP  of  the  NPLs  and  the  regulatory  capital 
position  of  the  bank.  Each  scenario  implies  different  regulatory  conditions  and 
consequences and involves different relevant authorities. 

Figure 3: Regulatory scenarios for NPL transfers to a State-owned AMC37 

Scenario 1: No State aid 

When  a  publicly-supported  AMC  buys  NPLs  from  a  bank  at  market  value,  it  acts  as  a 
market  economy  operator,  thus  providing  no  economic  advantage  to  the  ailing  bank. 
Hence, neither State aid nor extraordinary public financial support is granted to the bank, 
and  the  measure  is  consequently  not  subject  to  the  EU's  State  aid  and  bank  resolution 
framework. 

37 For Sis, all relevant stakeholders are denoted. ECB is also a stakeholder for SIs in all three stages (outside 

resolution due to need for involvement in PR, in resolution/insolvency because of involvement in FOLF). For 
cross-border LSIs, there is SRB competence, combined with NCA on the supervisory side. Concerning 
insolvency procedures, SRB is responsible for public interest test. 

30 

Inside Banking UnionOutside Banking UnionNo StateaidStateaid: precautionary recapitalisationFund aidif Single Resolution Fund is usedStateaid ifnational resolution fund is usedStateaid: liquidation aid under national insolvencyOutside resolutionWithin resolutionInsolvency procedures12334Member State competenceSingle Resolution Board competenceMember State competenceMember State competenceNational resolution authority competenceMember State competencex= scenario 
 
 
                                                            
Scenario 2: Resolution  

In the context of resolution of a bank, including State aid or Fund aid, the use of the asset 
separation tool (AST)38 requires the creation of an AMC. The purpose of such AMC is to 
separate selected assets from a bank’s balance sheet. 

The  AST  constitutes  one  of  the  four  resolution  tools  conferred  to  resolution  authorities 
under  the  new  EU  resolution  framework,  the  others  being  the  sale  of  business  tool,  the 
bridge bank tool and the bail-in tool. It should be noted that the AST may be applied only 
in  combination  with  another  resolution  tool  to  prevent  the  creation  of  an  undue 
competitive advantage for the failing entity.  

Preconditions  

In order to transfer assets, rights and liabilities to an AMC one of the following conditions 
must be satisfied: 

 

 

 

the  situation  of  the  particular  market  for  those  assets  is  of  such  a  nature  that  their 
liquidation  under  normal  insolvency  proceedings  could  have  an  adverse  effect  on 
one or more financial markets; 
the  transfer  is  necessary  to  ensure  the  proper  functioning  of  the  entity  under 
resolution or of a bridge institution; or 
the transfer is necessary to maximise liquidation proceeds. 

Concerning the first condition, the relevant EBA Guidelines39 apply. As such, resolution 
authorities would need to assess the situation of the market for these assets, and the impact 
of  a  disposal  of  these  assets  on  the  markets  where  they  are  traded  and  on  financial 
stability. 

Characteristics and requirements 

The AMC set up by the resolution authority will need to meet the following requirements: 
  The AMC will have to be created in accordance with the applicable national law. 
  The  AMC  is  wholly  or  partially  owned  by  one  or  more  public  authorities,  which 

may include the resolution authority.  

  The  AMC  is  controlled  by  the  resolution  authority  (in  particular  the  resolution 
authority  approves  the  strategy  and  risk  profile  of  the  AMC  and  approves  the 
remuneration  of  the  members  of  the  management  body  and  determines  their 
responsibilities).  

  The  AMC  has  been  created  for  the  purpose  of  receiving  some  or  all  of  the  assets, 
rights  and  liabilities  of  one  or  more  institutions  under  resolution  or  bridge 
institution. 

  The AMC’s existence is not required to be restricted in time. 
  The rights, assets and liabilities may be transferred on one or several occasions. 

38 Article 42 BRRD 
39 See the adopted text of the EBA Guidelines concerning Article 42(14) of Directive 2014/59/EU, available here.  

31 

 
 
                                                            
  The  rights,  assets  and  liabilities  may  be  re-transferred  from  the  AMC  to  the  entity 

under resolution under certain conditions. 40 

Valuations and transfer of assets, rights and liabilities 

To  inform  and  carry  out  the  resolution  action,  the  valuation  of  all  assets,  rights  and 
liabilities will be performed, in principle, by an independent third party appointed by the 
resolution  authority.  This  valuation  will  determine  the  disposal  value  of  the  transferred 
assets, rights and liabilities. This valuation will then inform the decision of the resolution 
authority on the value of any consideration to be paid to the institution under resolution.41 
All  losses  in  relation  to  the  transfer  will,  in  principle,  be  borne  by  the  resolved  bank’s 
existing shareholders and creditors. 

Aid provided through the resolution fund 

The  AMC  created  under  the  AST  will  likely  incur  significant  costs  (e.g.  establishment 
costs  or  ongoing  operational  costs).  In  addition,  an  adequate  level  of  capitalisation  and 
liquidity must be ensured. The Single Resolution Fund (SRF) and the resolution financing 
in  non-participating  Member  States  may  be  used  under  certain 
arrangements 
circumstances to ensure the efficient application of resolution tools and the exercise of the 
resolution powers.  

Any use of the SRF is subject to the Union State aid rules and requires authorisation from 
the European Commission. Support by the SRF requires a minimum contribution to loss 
absorption  and  recapitalisation  of  8%  of  total  liabilities  including  own  funds  by 
shareholders  and  creditors  of  the  entity  in  resolution  (bail-in),  if  losses  are  indirectly 
passed  on  to  the  SRF.  In  that  case,  the  upper  ceiling  for  contributions  by  the  SRF  is 
capped  at  5%  of  the  total  liabilities  including  own  funds  of  the  entity  under  resolution. 
Alternative funding sources may be activated in extraordinary circumstances and only in 
the  event  that  the  5%  limit  has  been  exhausted  and  after  a  full  bail-in42  has  been 
implemented.  

Scenario 3: Insolvency proceedings under national law 

Where  resolution  under  the  BRRD/SRMR  is  not  considered  to  be  in  the  public  interest 
NPLs can be transferred, in combination with State aid, within the context of insolvency 
proceedings  under  national  law.  In  this  case,  the  standard  practice  would  be  to  split  the 
failed bank and perform an asset separation so that the "good" part can be sold, provided 
that  this  is  possible  under  the  national  insolvency  framework.  Regarding  the  impaired 
assets,  centralizing  their  management  by  means  of  an  AMC  may  help  to  reap  the 

40 The resolution authority may transfer rights, assets and liabilities back from the AMC to the institution under 

resolution in one following circumstances: the possibility that the, rights, assets and liabilities might be 
transferred back is stated in the instrument by which the transfer was made or in the case of the rights, assets 
and liabilities do not in fact within the classes of, or meet the conditions for transfer of assets and liabilities 
specified in the instrument by which the transfer was made. 

41 Article 36(4)(e) BRRD and Article 20(5)(e) SRMR  
42 I.e. a bail-in of all unsecured, non-preferred liabilities, other than eligible deposits. See Art. 27(9)(b) SRMR.  

32 

 
 
                                                            
efficiency  benefits  of  AMCs  in  the  recovery  of  impaired  assets  sharing  common 
characteristics.43 

The  Commission's  Banking  Communication  of  2013  allows  Member  States  to  facilitate 
the  liquidation  of  an  ailing  bank  under  ordinary  insolvency  proceedings  through  State 
measures. The latter may involve the mobilisation of public resources through the national 
deposit guarantee scheme (DGS)44 or other resources imputable to the State to set up an 
AMC to which the impaired assets are transferred. Such liquidation aid can be considered 
compatible  with  the  internal  market  to  facilitate  the  exit  of  non-viable  players  in  an 
orderly  manner  without  endangering  financial  stability.  Notwithstanding  the  latter 
objective,  the  overarching  principle  of  limiting  the  amount  of  aid  should  remain  a  key 
priority. In that sense, Member States could favour a pure exit of non-viable banks rather 
than  their  (partial)  sale  to  competitors,  which  is  subject  to  additional  State  aid 
requirements.  

State aid in the form of an asset transfer to an AMC in the context of ordinary insolvency 
proceedings,  irrespective  of  whether  it  is  provided  through  the  national  DGS  or  other 
resources imputable to the State, must still comply with the general principles of the State 
aid  framework,  set  out  above.  Specifically  for  aid  in  the  context  of  the  orderly  winding 
down of an ailing bank, the 2013 Banking Communication states that its compatibility will 
be  assessed  on  the  same  lines  mutatis  mutandis  as  set  out  in  sections  2,  3  and  4  of  the 
Restructuring Communication (2009). Aid measures in this context must therefore comply 
with the above-mentioned general principles of the State aid framework, further tailored to 
a bank liquidation context: 

  Limitation  of  liquidation  costs:  The  aid  should  enable  the  ailing  bank  to  be 
effectively  wound  up  in  an  orderly  fashion,  while  limiting  its  amount  to  the 
minimum necessary. 

  Limitation of competition distortions: To avoid undue distortions of competition, the 
winding-up phase should be limited in time while the beneficiary ailing bank must 
neither  actively  compete  on  the  market  nor  pursue  any  new  activities  as  long  as  it 
continues to operate. 

  Burden  sharing:  To  minimize  moral  hazard  and  to  ensure  appropriate  own 
contribution to the costs of winding down by the aid beneficiary, the claims of the 
shareholders and subordinated debtholders must not be transferred to any continuing 
economic activity.  

In  addition  to  the  criteria  mentioned  above,  the  compatibility  of  a  transfer  of  impaired 
assets from an ailing bank to a publicly-supported AMC is also to be assessed under the 
Commission's Impaired Assets Communication of 2009. It is crucial to note however that 

43 See section 3.3. 
44 While a DGS's main objective is to repay covered depositors, in the transposition of the Deposit Guarantee 

Scheme Directive (DGSD) into national legislation, Member States are allowed to extend the mandate of the 
national DGS: Article 11(6) of the DGSD allows a DGS to use of its available means "to preserve the access of 
depositors to covered deposits, including transfer of assets and liabilities and deposit book transfer, in the 
context of national insolvency proceedings". However, the DGS has to ensure that the cost of such interventions 
"do not exceed the net amount compensating covered depositors" at the insolvent bank. 

33 

 
 
                                                            
the complete liquidation of the institution under ordinary insolvency proceedings does not 
require the transfer price of the NPLs to be below the loans' REV, as the residual entity 
will be facing constraints which limit distortions of competition and will totally exit from 
the market. 

Finally,  an  IAM  during  an  orderly  liquidation  procedure  can  be  part  of  a  wider  State 
measure that also includes the sale of (part of) the ailing bank. The latter may entail State 
aid  to  the  buyer,  unless  the  sale  is  organized  via  an  open  and  unconditional  competitive 
tender  and  the  assets  are  sold  to  the  highest  bidder.  The compatibility  of  the  sale would 
also  imply  a  verification  that  the  sale  can  contribute  to  the  restoration  to  long-term 
viability  of  the  transferred  economic  activity.  The  buyer  would  need  to  be  viable  and 
capable of absorbing the transfer of the troubled bank. 

Scenario 4: Precautionary recapitalisation 

Precautionary  recapitalisation  is  a  form  of  State  aid  that  can  be  given  under  exceptional 
circumstances,  which  –  provided  that  the  conditions  set  out  in  Art.  32(4)(d)(iii)  of  the 
BRRD45  are  complied  with  –  does  not  trigger  a  "failing  or  likely  to  fail"  (FOLF) 
determination for the bank. 

This tool is usually used for providing an extra capital buffer to a bank which is likely to 
become  distressed  if  economic  conditions  were  to  worsen  materially.  Nonetheless, 
precautionary  recapitalisation  can  also  be  used  in  the  specific  case  of  a  transfer  of 
impaired  assets  to  a  publicly  supported  AMC,  where  the  objectives  pursued  by  such  a 
transfer are the same as in case of a direct capital injection; and provided that the specific 
State aid conditions for impaired asset measures (IAMs) are also respected.46 

The  general  conditions  for  the  use  of  the  precautionary  recapitalisation  tool  and  the 
concrete steps for its practical application are presented below. 

A.  General  principles  established  in  the  BRRD  and  requirements  in  the  State  aid 

guidelines 

Objectives of the aid 

The  precautionary  recapitalisation  is  required  "to  remedy  a  serious  disturbance  in  the 
economy of a Member State and preserve financial stability". In addition, the aid "shall be 
proportionate to remedy the consequences of the serious disturbance".  

Form and temporary nature of the aid 

Article 32(4) BRRD aims to ensure that in the presence of an unlikely loss a solvent bank 
is provided with temporary support to ensure it can preserve its capital position. 

Article  32(4)(d)(iii)  of  the  BRRD  indicates  that  precautionary  recapitalisation  takes  the 
form  of  "an  injection  of  own  funds  or  purchase  of  capital  instruments".  The  notion  of 

45 An analogous provision is contained in Article 18(4)(d)(iii) of the SRMR. Any reference to the BRRD provision 

in the remainder of the text should be interpreted also as a reference to the SRMR provision.  

46 See Council (FSC Subgroup) report on NPLs, Annex 4 (p. 100-101). 

34 

 
 
                                                            
"own  funds"  refers  to  all  CET1,  AT1  and  T2  capital  instruments,  as  identified  in  the 
Capital  Requirements  Regulation  (CRR).  The  aid  "shall  be  of  a  precautionary  and 
temporary  nature".  Also,  Article  32  BRRD  requires  that  the  measure  must  be 
"proportionate to remedy the consequences of the serious disturbance".  

Subject to a case-by-case assessment, precautionary recapitalisation may be used to enable 
a removal of impaired assets from the beneficiary bank's balance sheet. Such a transaction, 
if  properly  structured,  may  achieve  exactly  the  same  recapitalisation  objective  for  the 
beneficiary  bank  as  a  straight-forward  injection  of  own  funds  or  purchase  of  capital 
instruments. In case of a direct injection of own funds, the assets are sold at market price 
and the State contributes with capital (or other forms of own funds/capital instruments) to 
ensure that the bank maintains its capital position following the loss from the sale of the 
assets. In case of an impaired asset relief measure, the bank is allowed to sell the NPLs at 
a  price  higher  than  market  price  (but  not  exceeding  the  assets'  real  economic  value 
(REV)).  Therefore  the  capital  position  of  the  bank  is  preserved  by  reducing  the  upfront 
loss. 

For the transfer of impaired assets to a publicly supported AMC to be proportionate and of 
a temporary  nature, as required by the  second subparagraph of Article 32(4) BRRD, the 
extraordinary  public  financial  support  must  be  limited  in  terms  of  amount  and  time.  To 
this  effect,  certain  safeguards,  in  order  to  ensure  compliance  with  the  above-mentioned 
legal requirements, can be considered such as: 

  a  conservative  assessment  of  the  assets'  estimated  market  value  and  real  economic 

value to ensure that unlikely losses are correctly identified; 

 

the AMC liability side which is structured in a manner that reduces the overall risk 
for  the  State  (e.g.  a  preference  for  guarantees  over  direct  financing  to  the  AMC, 
attracting private capital and funding to the maximum extent possible); 

  a clear exit strategy for the State from the extraordinary public financial support; 

  where appropriate, in particular where the estimated market price cannot sufficiently 
reflect  the  risk  of  a  [further]  deterioration  of  the  market  situation,  a  mechanism 
ensuring  that  the  State  will  not  bear  losses  higher  than  the  difference  between  the 
transfer price and the market value. 

In  the  case  of  using  an  IAM,  the  exit  strategy  should  be  foreseen  to  make  the  State's 
intervention (through the publicly supported AMC) temporary. This strategy may consist 
of different elements:  

  Prior to its set-up, the AMC's lifespan should be clearly limited in time. The lifespan 
should also be proportionate to its objective of working out / selling the purchased 
impaired assets. 

  Furthermore,  assets  that  the  AMC  would  acquire  will  in  general  have  a  fixed 

duration (i.e. a set maturity date) and are thus not perpetual in nature. 

When the AMC is backed by public guarantees, this support should also be available only 
for  a  certain  period  of  time.  Remuneration  clauses  featuring  a  step-up  fee  on  these 

35 

 
 
guarantees could be added to incentivise the AMC to end its reliance on State support as 
soon as possible, hence further limiting the State's involvement. 

Financial health of the beneficiary bank 

The beneficiary bank must be solvent. The assessment of a bank's solvency pursuant to the 
BRRD/SRMR is the responsibility of the competent supervisory authority. In past cases, 
the ECB has determined a bank as solvent based on the fact that it meets the own funds 
requirements (Pillar 1) set out in Art. 92 of the Capital Requirements Regulation (CRR).47 
In the context of a stress test and/or AQR, this implies that the bank should not have any 
shortfall  of  regulatory  capital  following  the  AQR  and  under  the  baseline  scenario of  the 
stress  test  (or  the  relevant  shortfalls  are  covered  by  private  means).  As  follow-up  of  the 
lessons learned from crisis cases, the ECB is currently reviewing its methodology for the 
assessment of a bank’s solvency in the context of precautionary recapitalisation. 

Furthermore, the beneficiary bank must not be deemed FOLF based on the criteria set out 
in Art. 32(4)(a/b/c) of the BRRD. This implies respectively that (i) the bank does not (and 
is not expected in the near future to) infringe its authorisation requirements in a way that 
would justify the withdrawal of its license, (ii) which also entails that the bank's assets are 
not (and are not expected to be in the near future) less than its liabilities, and (iii) that the 
bank is (and is expected to be in the near future) able to pay its debts or other liabilities as 
they fall due. The assessment of these FOLF criteria is the responsibility of the competent 
supervisory authority and, under certain conditions, the resolution authority.48  

Compliance with EU State aid framework 

A  precautionary  recapitalisation  is  required  to  respect  the  general  principles  of  the  EU 
State aid framework. More specifically, the BRRD requires it to "be conditional on final 
approval under the Union State aid framework", in particular the Commission's Banking 
Communication  (2013)  and  Restructuring  Communication  (2009),  and  that  it  is  granted 
"at prices and on terms that do not confer an advantage upon the institution". 

Moreover,  in  the  specific  case  where  this  tool  is  used  to  enable  a  transfer  of  NPLs  to  a 
publicly-supported  AMC,  compliance  with  the  specific  conditions  provided  for  in  the 
Commission's  Impaired  Asset  Communication  (2009)  is  also  required.  This  implies  that 
impaired  assets  can  be  purchased  by  the  AMC  at  a  transfer  price  (TP)  that  exceeds  the 
estimated market price (EMV) of the assets but which does not exceed their real economic 
value  (REV).  In  other  words,  if  a  State-controlled  AMC  buys  the  impaired  assets  at 
market  value,  there  would  be  no  State  aid  in  the  IAM.  In  such  cases,  the  public 
intervention  (i.e.  IAM)  would  not  qualify  as  extraordinary  public  financial  support  and 
therefore, the measure would not trigger FOLF-status for the entity and the assessment of 
the conditions for precautionary recapitalization would not be relevant. 

In  operational  terms,  as  explained  in  more  detail  below,  a  precautionary  recapitalisation 
budget  must  be  determined  to  identify  the  total  maximum  aid  that  can  be  granted.  The 

47 Consisting of a minimum 4.5% CET1 ratio requirement and a minimum 8% total capital ratio requirement 
48 The BRRD however does not require the competent supervisory or resolution authority and/or resolution 

authority to explicitly declare that the bank does not meet the FOLF criteria. 

36 

 
 
                                                            
budget  is  quantified  on  the  basis  of  the  capital  shortfall  which  emerged  from  the  stress 
test. 

The  precautionary  recapitalisation  budget  can  be  used  for  any  combination  of 
recapitalisation aid (injected into the bank to recapitalise it) and impaired asset aid (as a 
contribution to a higher price49 at which the bank transfers impaired assets to the AMC to 
help the bank avoid bearing the full extent of losses that would stem from the sale of the 
impaired assets in the market). The sum of the recapitalisation aid and the impaired asset 
aid cannot exceed the precautionary recapitalisation budget. 

B.  Precautionary  recapitalisation  budget  in  the  presence  of  a  transfer  of  NPLs  to  a 

publicly-supported AMC: practical application 

Step 1: Separating incurred, likely and unlikely losses and determining the precautionary 
recapitalisation budget  

The precautionary recapitalisation budget must be set in accordance with Art. 32(4)(d)(iii) 
of  the  BRRD,  which  requires  it  to be  "limited  to  injections necessary  to  address  capital 
shortfall established in the national, Union or SSM-wide stress tests, asset quality reviews 
or  equivalent  exercises  by  the  European  Central  Bank,  EBA  or  national  authorities". 
These  exercises  should  comply  with  the  applicable  EBA  guidelines.50  Furthermore,  a 
precautionary  recapitalisation  "shall  not  be  used  to  offset  losses  that  the  institution  has 
incurred or is likely to incur in the near future". In the context of a stress test and/or AQR, 
this implies that the bank should not have any shortfall of regulatory capital following the 
AQR  and  under  the  baseline  scenario  of  the  stress  test  (or  the  relevant  shortfalls  are 
covered by private means). 

In  order  to  comply  with  the  latter  requirement,  a  methodology  is  needed  to  make  a 
distinction  between  incurred,  likely  and  unlikely  losses.  Ideally,  such  a  methodology 
should be developed along the lines of the following practice.  

An  asset  quality  review  (AQR)  conducted  would  identify  incurred  losses  that  cannot  be 
covered by the precautionary recapitalisation. The baseline scenario of a stress test carried 
out following the AQR would identify likely losses which also cannot be covered by the 
precautionary  recapitalisation.  Only  the  losses  emerging  from  the  adverse  scenario  of  a 
stress test conducted together with an AQR (cleared from overlaps, if any, with those of 
the  baseline  scenario)  could  in  principle  be  eligible  to  be  covered  by  the  precautionary 
recapitalisation as they correspond to unlikely losses. 

A stress test and an AQR should be carried out as early as possible to ensure that data used 
to alculate the precautionary budget is up to date. If the most recent available stress test is 
deemed  partially  outdated  by  the  competent  authority,  the  application  of  the  procedure 
described above becomes more complicated. In this case, other specific  ad-hoc solutions 
might need to be applied. For instance, losses booked in published accounts after the date 

49 See Council (FSC Subgroup) report on NPLs, Annex 4 (p. 100-101). 
50 EBA, Guidelines on the types of tests, reviews or exercises that may lead to support measures under Article 

32(4)(d)(iii) of the Bank Recovery and Resolution Directive, EBA/GL/2014/09, 22 September 2014. 

37 

 
 
                                                            
of the stress test could constitute the basis for estimating incurred losses, and losses due in 
the near term on the basis of a prudent valuation of assets could give indications on likely 
losses  which  may  be  used  to  complement  and  refine  the  information  contained  in  the 
stress test. 

Figure 4: Determination of the precautionary recapitalisation budget51 

As for likely losses, while these may include losses necessary to comply with the requests 
of  the  supervisor,  they  should  not  include  losses  stemming  from  competition  measures 
necessary  to  authorize  the  State  aid.  Likely  losses  might  therefore  include,  for  instance, 
losses determined by the sale of impaired assets as requested by the supervisor, but should 
not  encompass  losses  necessary  to  deleverage  the  bank's  balance  sheet  (to  avoid 
distortions of competition) which are a necessary condition to receive State aid.  

Step 2: Covering incurred and likely losses with private means 

As the precautionary recapitalisation can only cover unlikely losses, any losses stemming 
from  the  baseline  scenario  of  the  stress  test  and  from  the  AQR  (respectively  considered 
likely losses and incurred losses) must be covered with private means. 

Items that are certainly to be counted as private means include CET1 capital in excess of 
Pillar  1  minimum  requirements,  cash  deriving  from  asset  sale  proceeds,  CET1  new 
issuances and capital generated by burden-sharing through the write-down or conversion 
of AT1 and T2 capital. 

In  case  private  means  are  insufficient  to  cover  incurred  and  likely  losses,  precautionary 
recapitalisation cannot be granted. 

51 The figure refers to a case where there is no overlap between losses in the baseline and in the adverse scenarios. 

38 

 
 
 
                                                            
Step 3: Addressing unlikely losses with State aid 

Once  incurred  and  likely  losses  are  fully  covered  by  the  bank's  private  means,  State  aid 
can  be  granted  to  cover  in  principle  all  the  remaining  losses  (i.e.  unlikely  losses  as 
identified by the shortfall in the stress test). 

The ultimate purpose of providing a precautionary recapitalisation is to remedy a serious 
disturbance in the market on a precautionary and temporary basis by covering the shortfall 
identified through the precautionary budget. To this end, the bank must be in a position, 
after  receiving  the  aid,  to  meet  its  prudential  requirements  set  by  the  supervisor.  In 
general,  a  precautionary  recapitalisation  that  does  not  allow  the  bank  –  also  taking  into 
account  available private means  –  to  meet its prudential  capital  requirements (set by the 
supervisor), after the recapitalisation has been implemented, cannot be authorized by the 
Commission. 

On the other hand, when the amount identified with the precautionary budget exceeds the 
amount of aid that would be needed to meet the SREP requirement set by the supervisor, 
an assessment should be made of whether aid up to the precautionary budget is needed and 
adequate  to  address  the  serious  disturbance.  As  indicated  above,  the  precautionary 
recapitalisation  budget  can  be  used  fully  or  partially  to  grant  impaired  asset  aid  by 
supporting a transfer  of NPLs to  a publicly-supported AMC above  the estimated market 
value (and up to the assets' real economic value). In practical terms, if the precautionary 
recapitalisation budget has not been fully depleted by the impaired asset aid, the difference 
may be injected in the bank as direct recapitalisation aid, provided that also in this case the 
direct  recapitalisation  aid  remaining  available  after  the  IAM  is  sufficient  to  allow  the 
beneficiary bank to meet its SREP requirements. 

Final considerations 

Given  the  tight  intertwining  of  the  State  aid  and  bank  resolution  framework,  efficient 
sequencing  and  coordination  between  the  various  stakeholders  (EU  and  Member-State 
level) is paramount: 

 

 

 

 

In  scenario  1,  sequencing  and  coordination  issues  do  not  arise  as  there  is  no  State 
aid. 

In scenario 2, once the competent supervisory or resolution authority declares a bank 
FOLF,  the  resolution  authority  (the  SRB  or  the  resolution  authority  of  the  non-
participating Member State) is the key stakeholder in the chain, as it has to propose 
and  implement  a  resolution  scheme,  after  authorisation  by  the  Commission  of  any 
Fund aid involved. 

In  scenario  3,  the  Member  State  is  in  charge,  following  the  resolution  authority's 
declaration  that  there  is  no  public  interest  in  resolution  and  the  Commission's 
authorisation of any State aid involved. 

In  scenario  4,  this  refers  to  the  competent  supervisory  authority  (SSM  or  national 
banking  supervisor  which  has  to  confirm  that  the  beneficiary  bank  is  solvent),  the 
Commission (in charge of authorising the State aid involved) and the Member State 
in question. 

39 

 
 
3.2.  Needed diagnostics and critical mass of impaired assets 

The  general  purpose  of  a  diagnostic  exercise  is  to  help  determine  the  sample  of  banks 
transferring  NPLs  to  AMC,  the  assets  to  be  transferred,  and  the  terms  and  conditions 
under the applicable EU legal frameworks at which a bank can transfer assets to an AMC. 
Authorities  should  also  use  the  diagnostic  exercise  to  demonstrate  that  the  AMC  has  an 
advantage over other NPL reduction measures from the perspective of the entire banking 
system.  This  could  be  based,  for  example,  on  the  magnitude  of  the  NPL  issue  or  on  its 
composition (e.g. whether the NPLs are concentrated in asset classes that lend themselves 
to an efficient resolution in an AMC), or the presence of adverse market conditions that 
render the value of NPLs uncertain or depressed. 

If a bank's transfer of NPLs to an AMC (considered as an impaired asset measure) is to be 
(partially)  financed  with  a  precautionary  recapitalisation  under  the  BRRD,  that  bank 
should first participate in a national or EU-wide AQR and stress testing exercise. An EBA 
guideline provides further details on the nature of that exercise52, which needs to have the 
following features: 

  a precise timeline; 
  a predefined scope, including a sample of banks justified by economic or prudential 

reasons; 

  a common reference date (i.e. the "cut-off" date for the balance sheet data used for 

the AQR/stress test); 

  a  common  methodology,  including  a  range  of  hurdle  rates  and  a  common 

macroeconomic scenario; 

  a quality assurance process, carried out by the relevant authorities. 

In the case of establishing an AMC supported by State aid53, the purpose of the diagnostic 
exercise  would  be  two-fold.  First,  it  should  help  the  authorities  to  determine  an 
appropriate  transfer  price,  which  typically  lies  between  the  (estimated)  market  value 
(EMV)  and  the  real  economic  value  (REV)  of  the  concerned  assets.54  Second,  it  should 
also inform the calibration of the potential related capital needs of the banks transferring 
assets to the AMC and the maximum amount of State aid which can be granted (i.e. the 
State aid envelope). Therefore and in order to achieve clarity on the health of bank balance 
sheets, the diagnostic exercise should consist of an AQR and a stress test. 

The AQR could focus particularly on a well-identified pool of assets, where potential risks 
are deemed to be particularly present and which are likely to be deconsolidated from the 
bank balance sheets through transfer to an AMC, if the type(s) of assets that constitute the 

52 Guidelines on the types of tests, reviews or exercises that may lead to support measures under Article 

32(4)(d)(iii) of the Bank Recovery and Resolution Directive, EBA/GL/2014/09. 

53 I.e. an AMC that is partially/fully publicly-owned (or even privately-owned but with actions which are 

imputable to the State, or benefiting from a State guarantee), buying assets at a transfer price higher than the 
EMV. 

54 The AQR should hence detect misclassification issues and provisioning gaps so that the bank's balance sheet 

can be restated in a 'clean' manner before application of the stress scenarios and authorities obtain more 
transparency on appropriate transfer prices. Losses which the bank has to book as a result of the AQR are to be 
considered as incurred losses. 

40 

 
 
                                                            
main source(s) of a bank's vulnerability are well-known and are captured within the scope 
of  the  AQR.  In  all  cases,  the  entire  asset  perimeter  should then  be  reviewed,  to  identify 
potential misclassification of NPLs and remedy the related provisioning shortfalls. Ideally, 
this should be carried out at the level of individual debtors to maximise the usefulness of 
the  results  for  the  AMC.55  The  AQR  methodology  should  facilitate  the  Commission's 
estimation of the EMV and REV of the concerned assets, so that the results can feed into 
the  related  valuation  process.  The  result  of  the  AQR  should  serve  as  the  reference  and 
departure point for the macroeconomic scenarios employed in the stress test. 

The  diagnostic  exercise  could  be  aligned  with  the  well-established  EU-wide  or  national 
stress testing exercises. A time constraint, however, may complicate this alignment, as the 
regular EU-wide stress test exercises is only performed periodically. As an alternative, and 
to  address  the  potential  need  for  methodological  adjustment  that  would  adapt  the 
methodology  better  to  the  context  of  an  AMC,  authorities  should  consider  running  a 
parallel stress  test  review of credit risk and  NPL valuations under the adverse  economic 
conditions. This review could use the adverse scenario of the EU-wide stress test, as long 
as it remains relevant, and the valuation models already established for the AQR. 

The  diagnostic  exercise  should  cover  either  the  entire  banking  system  of  the  Member 
State,  or  –  where  not  practically  possible  due  to  the  large  number  of  banks  –  all  banks 
above a predefined exposure to NPLs, expressed in absolute and relative terms. In case of 
a large number of smaller banks with a collectively significant NPL stock, the authorities 
should  carry  out  the  diagnostic  exercise  on  a  representative  sample  of  loans,  covering  a 
critical mass of relevant NPL portfolios. The diagnostic exercise should hence in this case 
be  a  top-down  exercise  run  by  the authorities  rather than  a  bottom-up  one  (which is  the 
case  of  the  EU-wide  stress  testing  exercises)  while  taking  into  account  resource 
constraints of the authorities. 

The  duration  of  this  diagnostic  exercise  should  be  kept  to  the  absolute  minimum. 
Nonetheless, based on past experience, the usual duration of an EU-wide stress test, from 
its  launch  to  conclusion,  stands  at  about  5  months.  This  is  however  the  case  of  a  stress 
testing  exercise  which  is  not  preceded  by  an  AQR,  which  is  going  to  add  at  least  two 
months to the process. In practical terms, a diagnostic exercise covering both an AQR and 
stress  test  is  therefore likely  to  require  a significant  time  to  execute,  possible  between  6 
and 12 months. 

IV.  DESIGN AND SET-UP OF AN AMC 

4.1.  Legislation, mandate and powers 

The objectives, oversight, roles, functions and main design features of a centralised AMC 
must be based in legislation. To the extent that the AMC is set up in a resolution context, 

55 There are synergies between the AQR and future due diligence and strategic review by the AMC management, 

for example related to filling the data gaps, understanding the past and current performance of the asset, 
updating the valuation of collateral, and analysing the legal position of the creditor. 

41 

 
 
                                                            
several  elements  are  foreseen  in  the  existing  framework  on  resolution  (BRRD  and 
SRMR).  These  provisions  are  of  course  to  be  complied  with.  If  specific  legislation  is 
needed  for  the  set-up  of  an  AMC,  it  must  take  the  specific  AMC  design  considerations 
into account – legislating for an AMC before the design-related work has been completed 
can  lead  to  difficulties  in  the  AMC's  operations  later  on.  In  particular,  the  primary 
objectives  of  the  AMC  must  be  provided  for  in  legislation  –  and  subsequently 
communicated  clearly.  The  mandate  of  the  AMC  must  also  be  clear  and  unambiguous. 
Any  secondary  objectives  should  be  avoided  unless  clearly  subordinated  to  the  primary 
objectives  The  AMC  should  be  empowered  to  implement  design-based  decisions,  with 
respect  to,  for  example,  in  scope  asset  classes,  asset  perimeter,  and  bank  participation. 
Legislation  should  also  contain  strong  oversight  elements,  which  will  help  insulate  the 
objectives of the AMC from being disrupted and can ensure that the AMC’s operations are 
free of influence or lobbying. 

Any  legislation  needs  to  be  drafted  with  the  expectation  that  it  will  be  tested  and 
challenged  in  court.  Such  processes  may  be  useful  in  underlining  the  legitimacy  of  the 
AMC, as well as its mandate and powers. 

Following from design and financial stability considerations, legislation should ensure that 
AMCs be established as a one-off vehicles. The asset transfers should be completed in a 
single round, and there should be no further opportunities for asset transfers to the AMC 
thereafter,  save  for  exceptional  circumstances.56  Without  these  provisions,  risks  to  the 
objective of the AMC and to financial stability more broadly may emerge. 

Banks  deemed  by  the  diagnostic  exercise  (cf.  above)  to  be  in  scope  to  transfer  assets 
falling within the identified asset perimeter (cf. section 4.4) to a publicly supported AMC 
may hence need to be obliged via national legislation to transfer these assets to the AMC 
at  the  identified  transfer  price,  which  cannot  exceed  the  REV  (cf.  section  4.4).  Obliging 
banks via national legislation to transfer the relevant NPLs to the AMC would impact their 
fundamental rights and would therefore need to be justified in the public interest (e.g. for 
financial stability purposes). The encroachment (i.e. the national measure) also needs to be 
proportional.  Most  notably,  it  needs  to  be  necessary  and  balanced  as  regards  the  public 
interest vs the protection of individual rights. 

The  AMC  should  be  designed  with  the  objective  to  maximise  the  recovery  value  given 
certain constraints.57 Assuming the objective of an AMC is to maximise the value of assets 
that it is endowed with, and based on an accurate asset valuation process, from the outset, 
the AMC should therefore aim to cover its costs (captured largely in valuations that led to 
the TP). If the AMC would be able to make significant profits, once all costs have been 
covered, it would imply that transfer prices of assets were too low, penalising banks and, 
potentially having imposed tax-payer costs associated with bank recapitalisations. Equally, 
an entity set-up to make losses is not credible, not least from public finance perspective. 
The risk-taking of the AMC should be limited to the areas that are strictly related to the 

56 See also sections 4.7. and 4.10.2. 
57 See section 5.2 for further details. 

42 

 
 
                                                            
work-out of its assets. The AMC should not assume open foreign exchange positions, or 
interest rate risk positions.  

Furthermore, it is essential that the AMC's legal toolkit is not restricted in any meaningful 
way, and that it should be treated as any other creditor. In particular, it should be allowed 
to  enforce  collateral  and  take  collateral  on  its  own  balance  sheet,  also  with  a  view  of 
developing  its  assets  to  maximise  their  value  (e.g.,  by  finishing  incomplete  real  estate 
projects). At inception, the AMC should carefully assess the assets and determine the right 
strategy (foreclose/acquire collateral, forbear/restructure, liquidate). However, the strategy 
for  individual  assets  should  be  periodically  reviewed  to  adjust  to  changing  market  and 
economic  conditions.  The  AMC  should  not  be  held  back  from  liquidating  assets  it  has 
once considered viable, if that is justified by changed circumstances.  

However, in specific cases, exceptions  may be considered to facilitate debt restructuring 
by the AMC. Notable an AMC is first and foremost not a typical investor. For example, 
this may relate to  waiving the required mandatory  take-over bids  in the event where the 
AMC acquires a qualified majority stake in a company. 

While  an  AMC  may  also  be  able  to  provide  interim  financing  against  strict  criteria,  it 
generally  should  not  be  granted  a  banking  license  or  an  asset  management  license.  In 
principle, an AMC could be granted a banking license to facilitate the provision of credit 
to third parties, although this might not be strictly necessary. However, this would likely 
subject  the  AMC  to  bank  regulation  and  supervision  as  well  as  stricter  disclosure 
requirements,  which  may  obstruct  the  discharge  of  its  responsibilities.  Furthermore,  a 
state-supported  bank  established  in  times  of  financial  sector  stress  may  not  be  well-
disciplined and sufficiently oriented to achieve the narrow goals set-out above. 

4.2.  Ownership and governance, institutional independence58 

Regardless if the AMC has public support or not it should operate as an independent legal 
entity,  and  not  as  a  governmental  agency.  Therefore,  it  should  not  be  part  of  the  public 
sector. It should have full budgetary independence59 and be protected from lobbying and 
political  review.  Managerial  appointments  at  the  AMC  should  be  merit-based  and  stay 
outside of political  control, as the AMC requires highly  specialised expertise in  order to 
fulfil  its  mandate.  The  same  applies  to  remuneration  policies  of  AMC  staff  and 
management. The required expertise is hard to find in the public sector and the AMC is 
likely to compete against private employers for suitable candidates especially once it gets 
closer  to  its  wind-down  date.  The  AMC  should  therefore  be  able  to  offer  market-
consistent  remuneration.  Being  run  as  a  private  sector  entity  can  demonstrate  a  distance 
from governmental and political influence. Greater flexibility in staffing, etc., can also be 
attained in this way. 

58 For a detailed discussion on the supervision and accountability of the AMC please refer to section 4.10.6. 
59 Budgetary independence is necessary to reduce the risk of political interference with the AMC’s operation via 

the threat of reductions in the AMC’s budget. 

43 

 
 
                                                            
4.3.  Asset perimeter and size of the AMC 

Initial considerations 

This section aims at identifying the size and scope of a centralised AMC where this type 
of vehicle could  maximize its comparative advantage in  recovering  value from impaired 
assets.  In  this  context,  it  should  be  noted  that,  as  a  complement  or  alternative  to  a 
centralised AMCs, there are several alternative impaired asset measures (IAM) that should 
be  considered  for  assets  where  the  benefits  of  management  by  a  centralised  AMC  are 
doubtful, and hence deemed unsuitable for transfer to such a vehicle. 

The success of a centralised AMC in remedying a significant stock of impaired assets in a 
Member  State  critically  hinges  on  its  scope.  Several  principles  are  key  for  identifying, 
within  a  given  market,  the  appropriate  size  and  scope  of  a  centralised  AMC.  These  are 
related to the AMC’s relative advantage in addressing specific classes of impaired assets, 
avoiding problems of creditor coordination by consolidating all debts of a debtor, the asset 
domicile, the overall capacity of the AMC (particularly the availability of third-party loan 
servicing), collateral liquidity, and political autonomy.  

The guiding principles are as follows: 

  Economies of scale and scope:  

o  By  being  the  main  holder  and  central  counterparty  of  a  specific  set  of 
problematic  assets  in  a  specific  banking  system,  AMCs  can  achieve  specific 
expertise and economies of scale in recovering value from specific assets. These, 
however,  will  be  diminishing,  as  the  number  of  assets  acquired  increases. 
Historical experience also shows that significant economies of scope for various 
asset classes are rarely achievable for AMCs. 

o  Centralised  AMCs  may  only  in  specific  cases  achieve  operational  synergies  in 
managing  several  asset  classes  simultaneously.  AMCs  can  potentially  realise 
some  such  synergies  by  pooling  all  outstanding  debt  of  larger  debtors  even  if 
these debts are split along different asset categories.  

o  Under  the  right  circumstances,  centralised  AMCs  could  aim  at  taking  over  a 
large  share  of  problematic  loans  of  a  certain  asset  class  to  achieve  greater 
economies of scale.60 Financial constraints around the size of AMCs and/or the 
impact on banks may justify choosing a narrower scope while nevertheless being 
sufficiently large to achieve the objectives of minimizing financial stability risks 
and  reducing  the  uncertainty  surrounding  the  concerned  banks.  This  choice 
should be made taking into account country-specific conditions and on the basis 
of the findings of the asset valuation exercise.61 

  Maintaining critical size:  

o  The  economies  of  scale  are  likely  to  be  diminishing  as  AMCs  grow  beyond  a 
certain  size  and  complexity,  as  described  above.  This  suggests  that,  in  general, 

60 In this case under financial crisis conditions, i.e. where certain dynamics are in evidence. 
61 See further section 4.4. 

44 

 
 
                                                            
centralised  AMCs  should  have  a  critical  size  without  becoming  too  large. 
Consequently, the available capacity for establishing an AMC – which is hence 
limited  –  should  be  utilised  for  assets  upon  which  an  AMC  will  have 
comparative advantage, on the basis of historical experience. 

o  The  wider  the  asset  scope,  the  larger  an  AMC  may  become  (assuming  the 
participation  perimeter  is  not  proportionately  diminished).  Controlling  the  size 
and perimeter of the AMC will mitigate a range of serious impacts such as fiscal, 
funding  and  capitalisation  challenges.  A  larger  vehicle,  assuming  it  relies  on 
government  guarantees,  will  create  also  create  a  contingent  liability  to  the 
Member State. Please see section 4.9 for a discussion on these aspects. Equally, 
the larger the vehicle, the more capital it will require, which may lead to issues at 
the set-up of the AMC.62 

  Finally, the presence of collateral underlying the AMCs' assets is important since this 
offers  the  vehicle  a  way  of  realising  value  over  time  as  depressed  collateral  values 
present  in  a  crisis  can  recover  over  time  when  macro-conditions  improve.  In  the 
absence  of  this  opportunity,  the  AMC  may  achieve  insufficient  recoveries.  CRE 
assets offer relatively easier value recovery in this regard than RRE, which affect the 
suitability of these assets for inclusion. As realising collateral for RRE will be highly 
problematic due to cultural, social and political realities, an AMC may not be able to 
solve the underlying problem. Therefore, AMCs should only in exceptional cases be 
considered as the instrument to do so. 

Asset perimeter 

Table 1 below gives an overview of the suitability of all major asset classes present in a 
bank  portfolio  for  workout  by  a  centralised  AMC.  In  general,  experience  suggests  that 
commercial  real  estate  (CRE)  loans,  corporate  lending  and  loans  granted  for  property 
development  have  historically  been  proven  to  be  suitable  instruments  for  transfer  to  a 
centralised AMC. 

Historically  successful  centralised  AMCs  have  often  been  given  the  mandate  to  resolve 
CRE and large corporate exposures (e.g. in Ireland, Spain, Korea, Sweden, United States).  

62 If the AMC is classified as a defeasance structure and reflected as such in the national accounts, private equity 

will have to be raised; a large private equity portion will be proportionately more difficult to raise than a smaller 
one. 

45 

 
 
                                                            
Table 1: Suitability of asset classes for workout by an AMC based on past experience  

Source: ECB 

On the other hand, retail loans, small business (SME) loans, and loans to the public sector 
have rarely been worked out by AMCs with good results.63 

  Loans secured by commercial real estate (including those where the borrower is 
an SME) tend to have relatively large unit sizes, which allow the AMC to maintain a 
relatively light operation. Moreover, these assets have a strong connection with real 
assets (often property) that have a lasting value over the medium and long term, and 
have reasonable prospects for improvements in value, linked to more general macro-
financial  improvements.  A  further  advantage  of  tackling  commercial  real-estate 
related  exposures  is  that  external  service  providers,  such  as  property  value 
appraisers,  property  managers  and other  property-related  service  providers,  tend to 
be  readily  available  in  the  market,  allowing  centralised  AMCs  to  function  with 
relatively few internal resources. 

  Loans  by  large  corporates  that  are  not  secured  on  CRE  also  exhibit  some 
important  characteristics  that  tend  to  make  them  suitable  candidates  for  transfer  to 
centralised AMCs. The exposures are often relatively large in size and are therefore 
relatively  cost  efficient  to  manage  and  service  for  the  AMC.  Corporate  exposures 
will typically be large and complex; being complex, they will require a high degree 
of work-out  intensity; but  these  inherent costs can  be outweighed by the return on 
working  out  large  exposures.  Viable  corporates  may  also  be  most  likely  to  benefit 
from  debt  re-structuring,  which  can  be  best  achieved  with  a  single  counterpart, 
rather  than  multiple  creditors.  This  implies  that  viability  assessments  will  be 
required. More generally, overcoming coordination challenges will be an important 
benefit of an AMC, as large corporates are more likely to have exposures to multiple 
lenders, and so the debtor-level approach is important. 

  Beyond these two primary categories, there is scope to consider other, residual 
portfolios  for  transfer.  Banks  own  holdings  of  real  estate,  be  it  commercial  or 
residential,  which  may  have  been  acquired  by  foreclosure  procedures,  have  been 
successfully transferred to centralised AMCs in the past. However, an AMC will not 
have a ready sales outlet for such assets and potential buyers may struggle to finance 

63 Performing residential mortgages and other retail loans have been in the scope of decentralized AMCs (e.g. 

UKAR) but not in centralised ones. Please see Annex 1 for further details. 

46 

 
 
 
                                                            
such  assets,  unless  vendor  financing  arrangements  are  put  in  place.  In  taking  a 
debtor approach, the AMC should be willing to accept residual portfolios beyond the 
perimeter  outlined  above,  to  ensure  that  all  of  a  given’s  debtors  exposures  are 
captured, so long as the majority of those exposures are CRE, corporate, etc. AMCs 
may  also  consider  acquiring  portfolios  of  non-performing  buy-to-let  mortgages, 
although  in  such  cases,  this  should  only  take  place  where  the  legislation 
underpinning  the  AMC  endows  it  with  sufficient  legal  powers  potentially  going 
beyond those available to the originating bank.64  

  Exceptions to these principles could be considered in specific contexts. It may be 
the case that a Member State identifies highly specific cases where it is desirable to 
transfer other asset classes to an AMC, including, for example, residential real estate 
mortgages and SME loans. These are, in general, unsuitable for AMC workout, but 
highly limited transfers could be considered in cases where, for example, the transfer 
would  allow  a  bank  to  eliminate  its  exposure  to  a  given  business  line  or  region, 
thereby aiding in its restructuring; where transfer would allow internal bank workout 
to  be  more  concentrated  on  other  exposures;  or  where  other,  highly  evident 
synergies with the AMC could be identified. The work-out of residential mortgages 
through  an AMC  carries  high  risks of  political  interference,  especially  for  primary 
residences  (owner-occupied  units).  In  these  cases  foreclosure  by  a  State-owned 
entity  like  an  AMC  might  prove  difficult.  In  such  circumstances,  it  cannot  be 
excluded  that  the  AMC  would  show  leniency  towards  distressed  homeowners  to 
such  extent  that  asset  recovery  is  impeded,  which  would  undo  any  benefits  of  an 
AMC. Political independence of the AMC would be a key criterion for considering 
the possible inclusion of residential mortgages. 

In  order  to  reduce  the  risk  that  such  exceptions  can  be  misused  and  threaten  the 
viability of the AMC, strict criteria and limits should apply to such circumstances. 
The proportion of assets, both in terms of value and/or volume, in such cases is not 
recommended  to  exceed  15%  of  total  AMC  assets.  This  exception  may  not  be 
applicable  where  the  debtor-level  approach  leads  to  a  higher  proportion  of  other 
assets being transferred. The rationale for this limit is, on the one hand, to prevent 
too  many  unsuitable  assets  being  transferred  into  the  AMC,  rendering  it  unduly 
burdened. On the other hand, this 15% envelope allows a “debtor-level” approach to 
be  taken;  that  is,  the  complete  transfer  of  a  given  debtors  exposures,  so  long  as  a 
significant majority of those assets are CRE-related and/or corporate, and exceed the 
minimum size thresholds, whilst not excluding residual transfers of other asset class 
exposures of the debtor. 

Other  asset  classes,  mainly  unsecured  retail  loans,  are  more  suitable  to  other  types  of 
IAMs and should not be considered for inclusion in a centralised AMC. The duration of 
these loans are often shorter offering less time for the AMC realising recovery and have 

64 A transfer could for example be considered for a well-identified pool of buy-to-let mortgages, in Member States 
where it is possible to acquire the underlying collateral quickly, the rights of the landlord are well protected, and 
where the underlying properties produce a predictable stream of income. 

47 

 
 
                                                            
the dual downside of potential political interference and very small individual loan sizes 
that lead to high complexity and costs related to servicing.  

Asset size 

A  minimum  size  threshold  for  loan  transfers  to  the  AMC  may  be  beneficial  as  it  would 
exclude the tail of small and granular exposures and retain only the more complex large-
ticket  exposures  for  the  centralised  AMC.  It  thus  avoids  the  problem  of  the  above-
mentioned  diminishing  returns  to  scale.  Historical  examples  support  using  a  size-based 
threshold,  the  calibration  of  which  should  be  country-  and  asset-class  specific.  The 
minimum size threshold should be calibrated in terms of the centralised AMC's envisaged 
critical size, country-specific characteristics, and the particularities of the asset perimeter. 
This would prevent an exponential increase in the number of exposures that a centralised 
AMC would have to take on, and furthermore would ensure that banks build and maintain 
capacity to work out NPLs on their own. 

Thresholds should  be  set  at  different  levels,  taking  into  consideration  also  the  impact  of 
the  threshold  on  the  total  portion  of  assets  affected.  At  the  highest  level,  a  debtor  level 
threshold should be established, which could be in  the order of EUR10 million.65 At the 
asset  level,  corporate  exposures  could  be  limited  to  those  above  EUR10  million,  CRE 
above  EUR  5  million.  Foreclosed  real  estate  assets  and  buy-to-let  mortgages  would  be 
limited  to  the  top  25%  largest  exposures,  in  terms  of  amount,  within  its  category  in  the 
relevant  national  banking  system.  Other  loans  would  be  limited  to  the  top  25%  largest 
exposures in terms of amount within its category in the relevant national banking system. 
These  thresholds  are  indicative  and  require  calibration.  As  a  result,  a  debtor  with  total 
exposure to a national banking system of EUR 10 million could have assets transferred to 
an  AMC,  while,  as  noted  above,  a  single  Corporate  or  CRE  exposure  above  EUR  10 
million and EUR 5 million, respectively, could be transferred.  

Debtor-level approach and avoidance of creditor coordination problems 

One  of  the  important  advantages  of  AMCs  is  that  they  help  solve  the  multiple-creditor 
problems by consolidating the total exposure of the banking system to a specific borrower 
in  one  entity.  For  this  reason,  multi-lender  and  syndicated  exposures  should  be  fully 
transferred  to  an  AMC  (even  if  the  debtor  performs  well  vis-à-vis  some  of  the  lenders, 
which  will  require  robust  legislation).  If  that  is  not  possible,  the  AMC  should  receive  a 
sufficient share in the total lending to a debtor to be able to work out the loan efficiently.66 
More  generally,  AMCs  should  take  over  the  entire  exposure  of  the  banking  system 
towards  troubled  debtors,  regardless  of  the  actual  performance  of  individual  loans.  This 
also  allows  for  the  complete  break  of  the  close  personal  links  that  sometimes  exist 
between bank staff and some debtors, in the case of substandard loan origination practices.  

65 NAMA, for example, set the threshold at EUR 20 million. 
66 For example, if insolvency legislation allows the majority of creditors to bind minority creditors 

(e.g. cram-down or collective action clauses), the AMC’s share should provide it with that majority. 

48 

 
 
                                                            
Asset domicile 

AMCs  may  in  principle  receive  both  domestic  and  foreign  assets.  This  choice  should 
depend only on the nature of the assets and the prospects of recovery by the AMCs. The 
AMC should assess the jurisdiction in which the asset is located and whether it has or may 
acquire comparative  advantage in  the management of such assets compared to the bank. 
For example, if a foreign asset is located in a developed jurisdiction where the bank has 
little expertise, transferring this asset to an AMC may be a good option. Conversely, if an 
asset  is  located  in  a  jurisdiction  where  the  bank  has  a  local  presence  (e.g.  through  a 
subsidiary)  and  where  the  rule  of  law  is  less  developed,  this  asset  may  benefit  from 
continued management by the bank. 67 

4.4.  Asset valuation principles and processes 

General considerations on asset valuation 

In  the  case  of  a  AMC  that  receives  State  aid,  in  the  interest  of  sound  management  of 
private and public finances, it is crucial that transfer prices are set in a way that provides 
an optimal level of relief for the troubled bank while ensuring the AMC is able to recover 
in an adequate manner all costs implied by its operations. In a stressed environment, it is 
likely that market values of impaired assets are significantly depressed.  

A transfer  at market value  may not  provide relief to  the troubled bank because  it would 
crystallise  high  losses  and  erode  its  capital  buffers,  but  could  lead  to  the  potential  gains 
from the recovery of assets by the AMC later on. Instead, publicly-supported AMCs can 
intervene by purchasing troubled assets at a price which is higher than their market price 
(but not higher than the assets' real economic value (REV)  – see below and section 2.5.) 
and thus provide aid equalling the amount by which the transfer price exceeds the current 
market price. In this case, all future cash flows and costs generated by the management of 
the  impaired  assets  should  be  taken  into  account  in  an  adequate  manner  in  the 
determination of the transfer price.68 

The determination of the exact transfer price of the impaired assets needs to rest upon an 
asset  valuation  that  complies  with  the  principle  of  prudence  in  order  to  maximize  the 
chances  of  the  AMC  to  at  least  break  even  (and  in  best-case  scenarios,  to  earn  a  small 
profit) and maximize the taxpayers return. In this regard, it may not be possible to value 
every asset within a reasonable period of time prior to the transfer due to the sheer number 
of assets subject to the transaction. An ex-post due diligence performed by an independent 
valuator with a full granularity will be needed in such case. To minimise the impact of this 
due  diligence  on  the  transferring  banks,  it  is  therefore  recommendable  to  set  prudent 
transfer prices. 

67 In general, very complex financial assets are best left with the bank, since there is no obvious comparative 

advantage to the AMC managing this type of assets. 

68 See below for the definition of the REV. 

49 

 
 
                                                            
On the cost side, realistic assumptions should be made regarding the costs that an AMC 
will  face  over  the  course  of  its  activity:  funding  costs,  loan  workout  costs,  operational 
costs,  legal  costs,  servicing  costs  as  well  as  fiscal  charges.  Flanking  structural 
reforms/legislative  amendments  that  have  a  positive  impact  on  the  development  of 
secondary  market  for  impaired  assets  and  on  cash  flows  (e.g.  insolvency  or  collateral 
enforcement reforms which shorten or simplify the loan workout process) need to be taken 
into  account  in  an  adequate  manner  as  they  can  substantially  affect  asset  valuations  and 
therefore  the  conditions  for  economic  soundness  of  an  AMC.  Closely  intertwined  is  the 
prudent estimation of the cash flows that are projected to be generated by the recovery of 
the loans over the course of their lifetime.  

It is the responsibility of the Member State / AMC to perform a valuation of the impaired 
assets to determine their possible transfer price. Since this process is often very complex, 
Member  States  /  AMCs  often  hire  third-party  experts  to  provide  assistance  in  assessing 
market-specific  risk  premia,  the  credit  restructuring  potential  and  the  collateral  recovery 
process.  

On  the  basis  of  that  work  by  the  Member  State  /  AMC,  the  Commission  –  in  its 
responsibility  of  enforcing  State  aid  rules,  and  often  with  the  help  of  external  experts  – 
will  estimate  the  transferred  assets'  market  value  (estimated  market  value  or  EMV)  to 
assess  the  presence  of  aid,  as  well  as  their  REV  in  order  to  determine  –  in  case  aid  is 
present – whether this aid is compatible.69 As this process may require significant time and 
resources, Member States may put in place tools to facilitate the Commission's valuation 
assessment.  Databases  set  up  in  the  context  of  in-depth  (regular  or  irregular)  valuations 
such as AQRs can be of great help and yield substantial synergies that will save time and 
resources. 

Estimated market value (EMV) 

In circumstances where there is no liquid market and no directly comparable transaction 
taking place at the same moment, the Commission  may, in order to establish the market 
value, use adjusted benchmarking to correct the price observed for the sale of assets that 
have  some  similarities  with  the  assets  in  question.  The  adjustment  is  based  on  the 
difference of the characteristics and quality of the two sets of assets. 

Real economic value 

The concept of REV was introduced by the Commission's Impaired Asset Communication 
of 2009, and is defined as the "underlying long-term economic value of the assets, on the 
basis of underlying cash flows and broader time horizon". It is an estimation of the asset 
value  by  disregarding  the  additional  haircuts  which  private  investors  require  because  of 
the lack of information and because of the temporary illiquidity of those assets. If markets 
are  efficient  and  liquid,  the  REV  of  assets  equals  the  assets'  market  price.  However,  if 
markets are seized up by lack of information and illiquidity, the REV usually exceeds the 
market price (or EMV) (see Figure 5). 

50 

 
 
                                                            
 
In the context of NPLs, REV will typically be lower than the assets' net book value (NBV) 
in  banks'  books  as  banks  either  do  not  have  an  incentive  or  are  even  prohibited  by 
accounting  rules  to  reduce  the  book  value  of  asset  without  objective  evidence  of 
impairment70. This implies that the transfer leads to losses for the banks in many cases. 

Figure 5: Example71 of the potential articulation of the different value indicators 

Source: Commission Services (DG COMP) 

The  Impaired  Asset  Communication72  caps  impaired  assets'  actual  transfer  price  at  their 
REV  so  that  the  transfer  to  the  publicly-supported  AMC  does  not  relieve  a  bank  from 
losses  that  are  foreseeable  (likely).  This  also  helps  to  minimize  possible  losses  for  the 
AMC  (and  thus  indirectly  taxpayers)  and  fosters  adequate  ex-ante  recognition  of  losses. 
Any transfer price exceeding the REV is incompatible aid and ought to be repaid by the 
beneficiary bank.  

REV calculation methodologies 

The  calculation  of  REV  is  done  on  a  case-by-case  basis  and  takes  into  account  several 
elements: the type of the assets and the underlying collateral (and the location of the latter 
in  the  case  of  real  estate),  the  expected  cash  flows  (and  their  expected  timing),  various 
costs  (including  servicing  costs,  funding  costs,  taxes  and  maintenance  costs),  the  long-
term macroeconomic outlook as well as the application of a discount factor that correctly 
reflects  the  risks  and  provides  an  adequate  remuneration  for  the  buyer  (here  a  state-
supported AMC). 

Whilst the Impaired Asset Communication gives some guidance on the methodology to be 
followed to arrive at the REV, a formula which would be directly applicable to all types of 

70 However, the introduction of IFRS9 will change this paradigm with the use of provision based on 1-year or 
lifetime expected credit losses. Being based on a forward-looking perspective, this new methodology will 
favour by construction early recognition of impairments. 

71 In this example, the transfer price is below the REV but it could be higher and at most equal to REV (for the aid 

to be found compatible by the Commission).  

72 Please see section 2.5 for further details on the Communication. 

51 

 
 
 
                                                            
assets  is  difficult  to  design  given  the  heterogeneity  of  the  assets  potential  concerned.  In 
any  case,  the  valuation  method  should  be  consistent  at  Community  level  and  based  on 
observable  market  inputs  and  realistic  as  well  as  prudent  assumptions  about  future  cash 
flows. 

In practice, the Commission has relied on external valuation experts who have consistently 
applied the following methodology for assets in dysfunctional markets. 

Two simplified examples of formulas applied in the past are presented: 

(a) Cash flow-based method 

After  an  accurate  and  prudent  estimation  of  the  future  cash  flows  related  to  the  assets 
(including their collateral where relevant), the REV is obtained through a discounting of 
all  future  cash  flows  (net  of  workout  costs)  using  a  sufficiently  prudent  credit  spread 
("a risk premium") over and above the risk-free rate:  

𝑅𝐸𝑉 =   ∑ 𝐸(𝐶𝐹𝑖) (1 + 𝑅𝑟𝑖𝑠𝑘−𝑓𝑟𝑒𝑒,𝑖 + 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑝𝑟𝑒𝑎𝑑𝑖)

⁄

𝑖

The applicable credit spread premia depend on the default probability of the asset and its 
maturity whereas the sum of E(CF) is estimated in a manner that avoids double-counting 
of risk in the numerator and denominator of the formula. 

(b) Direct expected loss-based method 

If the bank has default probabilities (PD) and loss given default (LGD) figures available at 
individual asset level, experts can calculate “stressed expected losses”.  
The resulting 𝐸𝐿𝑠𝑡𝑟𝑒𝑠𝑠𝑒𝑑 =   𝑃𝐷𝑠𝑡𝑟𝑒𝑠𝑠𝑒𝑑 ∗   𝐿𝐺𝐷𝑠𝑡𝑟𝑒𝑠𝑠𝑒𝑑 is then plugged into the formula 
𝑅𝐸𝑉(𝑖𝑛 %) = 100 % −   𝐸𝐿𝑠𝑡𝑟𝑒𝑠𝑠𝑒𝑑.  

In  the  case  of  non-performing  exposures,  if  the  "stressed  expected  loss  base"  method  is 
used,  default  probabilities  are  assumed  to  be  100%  and  the  focus  lies  on  prudently 
estimating  recoveries  (net  of  all  workout  costs  and  reflecting  the  time  to  carry  out  the 
workout). It therefore converges with the result of the cash flow based method. 

Country-specific characteristics that may influence the calculation of REV are to be taken 
into account as  much as possible. Structural reforms undertaken by a Member State, for 
instance  regarding  insolvency  and  collateral  repossession  frameworks,  may  significantly 
influence  recovery  values  over  a  given  horizon.  When  it  is  generally  accepted  by 
observers that these reforms will be efficient and fully implemented, they should be duly 
taken into account in the valuation.73 

73 While information at the macroeconomic level provides an important basis for the valuation, some cases require 
to delve deeper and to incorporate as much as possible microeconomic features and developments that may 
significantly affect the REV. This would typically be the case for CRE assets which intrinsic features may vary 
substantially from one place to another. For instance, an office building with substantial annual maintenance 
costs would put downward pressure the net cash flows which it can be expected to generate, despite a positive 
overall trend in the market as a whole. 

52 

 
 
 
                                                            
4.5.  Accounting aspects 

4.5.1.  Accounting standards 

In case the AMC is a non-listed limited liability company without a banking license, it has 
to  prepare  and  publish  financial  statements  in  accordance  with  national  Generally 
Accepted  Accounting  Principles  (GAAP).  The  national  GAAP  must  be  aligned  with  the 
EU accounting Directive. The EU accounting Directive aims at providing a true and fair 
view  of  the  financial  position  and  financial  performance  of  the  reporting  company.  It 
includes  specific  requirements  on  valuation,  presentation,  disclosure,  publication  and 
statutory  audit.  However,  Member  States  have  the  option  under  the  IAS  Regulation  to 
allow  or  require  the  use  of  EU  endorsed  IFRS  for  companies  or  public  interest  entities 
(including  banks)74.  If  the  IFRS  option  is  used  requirements  on  management  reports, 
disclosures and statutory audit in the Accounting Directive continue to apply. If the AMC 
issues securities (shares or debt securities) on an EU regulated market, it must use IFRS 
for  its  consolidated  accounts.75  Hence,  the  applicable  accounting  framework  for  the 
preparation  of  financial  statements  by  the  AMC  is  either  EU-endorsed  IFRS  or  national 
GAAP.76  

Within  the  limits  outlined  above  and  depending  on  how  Member  States  have 
exercised  options,  the  AMC  can  choose  its  applicable  accounting  framework. When 
exercising that choice, the authorities should consider the objective of the AMC, which is 
to recover the long-term economic value of the assets over the specified term and to foster 
financial stability.77 In particular, the choice of the accounting framework should take into 
account  the  risks  related  to  the  funding  structure  (e.g.  the  likelihood  of  government 
guarantees,  if  applicable,  being  triggered)78,  and  the  associated  knock-on  effects  on  the 
willingness of private investors to participate in the ownership structure. A higher relative 
use of fair value in the accounting framework could lead to more volatility of the P&L or 
capital than the use of historic cost combined with credit loss provisions. In the worst-case 
scenario, that volatility may lead to the AMC unravelling which  could be detrimental to 
financial stability and public finances. 

Even  though  there  might  be  no  legal  requirement  to  prepare  financial  statements 
according  to  IFRS,  AMCs  may  apply  EU-endorsed  IFRS  if  Member  States  have 
allowed  that  for  non-listed  companies.  The  application  of  IFRS  may  increase 
transparency for the stakeholders involved in the AMC, being beneficial especially in the 
case  where  AMC  bonds  are  placed  with  third-party  investors  without  the  protection  of 

74 Several Member States (including EE, IT, GR, HR, CY, LV, LT, MT, SI, SK) have used the IFRS option to 
require banks to prepare IFRS financial statements. Some other Member States (such as LU, NL, FI or UK) 
allow banks to use IFRS for the preparation of financial statements. 

75 See section 4.5.2.iii on the potential need to prepare consolidated accounts and the idea that the AMC might be 

considered as an investment entity in the meaning of IFRS 10.27. 

76 See the EU Commission’s homepage on financial reporting. For EU rules that limited liability companies have 

to follow when preparing financial statements see directive 2013/34/EU (“Accounting Directive”).  

77 See section 2.1 on the mandate and objectives, and 2.3 on financial stability considerations.  
78 See section 3.8 on the funding strategy. 

53 

 
 
                                                            
government  guarantees.  The  current  common  use  of  IFRS  in  the  financial  sector  in  a 
Member State may be another argument for considering the use of IFRS. 

4.5.2.  Specific aspects of accounting  

From the AMC perspective, there are essentially two relevant accounting issues: 

1.  "Initial recognition" incl. the accounting value of the transferred NPL asset that the 
AMC uses when including the transferred asset on its balance sheet for the first time;  

2.  "classification and subsequent measurement"; 
3.  also  the  accounting  for  investments  from  an  AMC's  perspective  needs  to  be 

considered. 

From the transferring bank perspective, the following accounting issues are important to 
consider during the set-up of an AMC: 

1.  "de-recognition" of transferred NPLs; 
2.  consolidation or accounting for investments in the AMC. 

To illustrate the possible accounting issues faced by an AMC, it is assumed that the AMC 
uses IFRS. The same accounting issues will occur when the AMC uses national GAAP but 
the outcome may be (slightly) different. Note that several Member States have provisions 
in their national accounting laws requiring the use of IFRS in case an issue is not covered 
in their national GAAP.  

i.  Initial recognition: Accounting specifics at transfer 

The main aspect to be considered at the transfer of the NPL financial assets from banks to 
the AMC is the initial value of the transferred NPL transferred asset on the AMC's balance 
sheet.  

First time recognition of the NPL asset on the AMC’s balance sheet shall be at its fair 
value.  In  the  IFRS  context,  IFRS  9  and  IFRS  13  assume  that  the  transaction  price  is 
normally the financial instrument’s fair value at initial recognition. However, there can be 
exceptions. Assuming that the transfer takes places at the REV or at a price between the 
EMV and REV, it needs to be proven that the TP is the fair value. As the TP differs from 
the EMV – with the EMV estimated “based on observable transactions for similar types of 
assets” – such proof might be difficult.  

The  difference  between  the  TP  and  fair  value  (potentially  the  EMV)  needs  to  be 
considered according to IFRS 9.B5.1.2A which may lead to recognising this difference at 
initial  recognition  of  the  asset  or  deferring  the  difference  over  time.  The  recognition  of 
such differences might have a significant impact on the AMC’s equity. 

ii.  Classification and subsequent measurement  

Although the amount of initial recognition of financial instruments is the same irrespective 
of  their  classification,  the  accounting  classification  creates  differences  in  how  financial 
instruments will be subsequently "measured" (valued) over their remaining life. 

54 

 
 
IFRS  has  three  main  classifications  with  specific  subsequent  measurement  approaches: 
1) "amortised cost", 2) "fair value" with fair value changes through Profit or Loss (FVPL) 
or  3)  fair  value  with  changes  directly  in  equity  (FVOCI)  (see  classification  scheme  in 
Figure 6).79 The fall back classification in IFRS is fair value at profit or loss80.  

IFRS provides rules and principles for the classification of financial instruments based on 
a  combination  of  the  contractual  cash-flow  features  of  the  transferred  NPLs  and  the 
AMC's business model. The business model could for example be to run-off the NPLs or 
to manage the sale of NPLs81. In addition to these mandatory classification criteria, IFRS 
allows  to  apply  fair  value  optionally  for  example  to  prevent  accounting  mismatches 
between  financial  assets  and  liabilities  or  hedging  instruments.  Respective  decisions  on 
the valuation approach are always based on an individual evaluation by the management 
of the AMC. 

Figure 6: Classification assessment under IFRS 9: process to apply requirements 

Source: EBA,: IFRS 9.B3.2.1  

Most financial assets transferred to the AMC are likely to meet the test of having “solely 
payments of principal and interest” (SPPI). In that case, if the AMC’s business model is to 
pro-actively manage (i.e. sell) these assets then the financial assets would be measured at 
fair  value. In case the AMC business model would be to run  off the NPL loan portfolio 
then it is collecting contractual cash flows only and can measure the financial instrument 

79 It is assumed in the following that IFRS 9 will be applicable when an AMC starts its operations. The 

classification of a financial instrument needs to be done at its recognition (IFRS 9.3.1.1). However, as this has 
significant impact on the ongoing accounting, it is described in this and not the following section. Potential 
reclassification is not covered in this Blueprint. See also for more details IFRS 9.4.1, 4.2 and IFRS 9.4.15. 
80 Looking beyond IFRS accounting, also the Accounting Directive, which national GAAPs have to comply with, 
requires that Member States either require or permit the application of fair value accounting for certain financial 
instruments as well as other assets. 

81 See section 5.2. 

55 

 
 
 
                                                            
at  amortised  cost82.  The  measurement  of  financial  instruments  at  amortised  cost  creates 
generally  less  volatility  than  measurement  at  fair  value.  However,  measurement  at 
amortised  cost  implies  possible  "impairment"  charges83  and  does  not  allow  showing 
profits if the fair value of the NPL portfolio would go up before actually selling the NPL 
portfolio. 

iii.  Accounting for investments from an AMC's perspective 

Avoiding the need to prepare consolidated accounts is of crucial importance. As such, in 
respect of the accounting of subsidiaries it is assumed that the AMC is considered as an 
investment entity according to IFRS 10, which means that its subsidiaries are measured at 
fair value. 

iv.  De-recognition from a bank's perspective 

The set-up structure of the AMC should be such that the transferred assets qualify for de-
recognition  and  that  the  AMC  is  not  consolidated  from  the  banks’  perspective  (see 
section 1.1.2.4).84 If these aspects are not carefully considered, then the whole exercise of 
setting up an AMC will be undermined because the NPLs will remain on the balance sheet 
of the transferring bank.  

The transferring bank will need to examine whether the transferred assets qualify for de-
recognition  from  its  financial  statements.  IFRS  provides  rules85  for  deciding  whether  a 
financial  asset  can  be  de-recognised.  Important  conditions  for  de-recognition  are:  the 
transfer  of  the  rights  to  receive  contractual  cash  flows  to  the  AMC  and  the  bank  not 
substantially retaining risks and rewards. 

v.  Consolidation or accounting for investments in the AMC 

The set-up of a national AMC should avoid the need for any of the transferring banks to 
consolidate  the  AMC  as  otherwise  the  transferred  NPLs  would  be  included  in  the 
consolidated accounts of the transferring bank.  

According to IFRS, consolidation is needed, in case an investor controls another entity. As 
it is assumed that the AMC has got its pre-set mandate to manage its assets itself and run 
them down with the primary objective to maximise the recovered value on a commercial 
basis  from  the  sales,  such  control  can  most  probably  not  be  assumed.  However,  an 
individual  judgement  will  be  needed  in  each  separate  case.  In  case  the  AMC  includes 
assets from several banks, the examination of a need for consolidation at each bank will 
need  to  consider  if  it  holds  interests  in  a  “silo”,  i.e.  a  deemed  separate  entity  within  the 

82 IFRS 9.B.4.1.6. However, in case the AMC’s aim is solely to recover the money from the customers or try to 

recover values from collaterals, then the amortised cost would be the appropriate valuation approach 
(assessment additionally depending of the instruments’ cash flows). A third option would be the recognition of 
the financial assets at fair value through other comprehensive income. However, this option will not further be 
elaborated here (see IFRS 9.4.1.2A). 

83 Given the nature of the assets, it is probable that the bulk of the assets would already be impaired prior to the 

transfer and be acquired at a significant discount with respect to the gross book value. The likelihood of future 
impairments would therefore be limited by the transfer price mechanism. 

84 See section 5.3 on AMC interaction with transferring banks. 
85 See IFRS 9.3.2. 

56 

 
 
                                                            
AMC  that  includes  its  former  assets.  I.e.  the  examination  will  not  consider  the  whole 
AMC, but the respective “silo” of assets originally transferred by the bank. 

The ownership and control structure should be such that the AMC is de-consolidated and 
considered  either  as  an  investment  entity  according  to  IFRS 10  "consolidated  financial 
statements" or an investment in an associates and joint ventures IAS 28 applies. 

Potential issue: Going beyond accounting aspects, the AMC’s set-up structure shall also 
be  designed  in  a  way  to  prevent  that  the  AMC  would  be  under  the  prudential  scope  of 
consolidation from the banks’ perspective. 

4.5.3.  Accounting related disclosures 

The  AMC  should  aim  to  make  its  financial  condition  and  operations  transparent,  as 
required  under  the  relevant  accounting  framework.  The  AMC  shall  apply  accounting 
related  disclosure  requirements  as  applicable  according  to  national  law.86  In  case  it 
provides  financial  statements  according  to  IFRS  on  a  voluntary  basis,  respective 
disclosure  requirements  –  provided  in  its  “notes”  to  the  financial  statements  –  shall  be 
applied accordingly.  

4.6.  Data 

4.6.1.  Need for harmonisation of data 

The need for harmonised data on NPLs is highlighted by all stakeholders for a number of 
reasons.  Detailed  and  binding  data  requirements  will  reduce  information  asymmetry, 
which is identified as one of the major factors for wider bid-ask spreads in NPL markets, 
and  is  partly  caused  by  incomparable  and  poor  data  on  NPLs.  The  EBA  has  therefore 
developed  standardised  NPL  data  templates87,  “EBA  NPL  Templates”,  which  consist  of 
templates  for  (1)  financial  due  diligence  and  valuation  purposes,  and  (2)  portfolio 
screening. The templates are focused on collateral related data, differentiating real estate 
collaterals (including e.g. tenant related data) and other collaterals (incl. guarantees). They 
also cover data on historical cash collections, the status of legal enforcement (e.g. status in 
the insolvency process), forbearance related information etc.. The templates also take asset 
class,  country  specific  as  well  as  confidentiality  aspects  into  consideration.  These 
templates  envisage  laying  the  foundation  of  secondary  NPL  market  activity  providing 
increased  transparency  and  comparability  of  respective  data  and  therefore  to  be  used  by 
banks  and  investors  in  NPL  related  transactions.  For  that  reason,  fully  completed  data 
templates are a condition for a transfer of loans from banks to AMCs. Furthermore, AMCs 
will need to keep this data updated in their systems and readily available, so that the data 
can  be  easily  provided  to  prospective  investors,  either  for  financial  due  diligence  / 
valuation purposes or for the initial portfolio screening. 

86 See also the EU Commission’s publications on transparency requirements for listed companies and non-

financial reporting. 

87 http://www.eba.europa.eu/risk-analysis-and-data/eba-work-on-npls  

57 

 
 
                                                            
4.6.2.  Data needs 

Financial  due  diligence  /  valuation  and  portfolio  screening  require  different  data  with 
different level of granularity. These different data needs are assumed to build up on each 
other so that their usage by banks and AMCs is as simple as possible. The data needs for 
financial  due  diligence  and  valuation  purposes  are  the  most  detailed,  and  these  include 
loan  by  loan  data  along  with  identified  data  needs  for  all  asset  classes  and  potential 
differentiation between them, whereas the level of detail decreases for screening purposes: 

Figure 7: Data needs 

The  data  for  the  portfolio 
screening  enable  potential 
bidders to analyse a portfolio 
at  a  high  level  so  that  they 
are  able  to  identify  if  the 
portfolio  acquisition  is  of 
general  interest  or  not.  The 
data  for  the  financial  due 
valuation 
and 
diligence 
enable  potential  bidders  to 
perform  proper  and  detailed 
a 
analysis 
financial 
portfolio and to conclude a bid price.  

of 

Data needs vary between asset classes (e.g. mortgage loans, commercial real estate loans, 
auto  loans  etc.).  Therefore,  asset  class  specific  templates  have  been  developed.  These 
templates include not only data on individual loans and collateral (e.g. information about 
the  loan  type,  maturity,  client,  information  about  the  collateral),  but  also  general  market 
data  (e.g.  bankruptcy  proceeding  periods  or  cash  outflows  related  to  legal  or  servicer 
costs). 

4.6.3.  Data quality 

High  quality  asset  data  is  of  prime  importance  as  they  form  the  basis  for  financial  due 
diligence and objective valuations for all parties involved. Data quality consists of several 
aspects: 

  Completeness: all required data are reported; 
  Accuracy: data reflect reality; 
  Validity: data values are reported as specified; 
  Consistency:  data  are  consistent  across  fields,  templates,  external  sources,  over 

time without duplications; 
Integrity: consistent relations between entities and attributes; 

 
  Timeliness: data are updated and available when needed. 

Banks should therefore be required to run rigorous internal controls and quality checks to 
ensure that data  provided to the AMC are as  complete,  accurate, reliable, consistent  and 
timely as possible. Banks should also be required to comply with validation rules before 
submitting data to the AMC. 

58 

 
 
 
AMCs should be expected to perform a thorough data quality assurance before taking on 
new assets. Immediate actions upon establishment of the AMC include data collection and 
clearing, categorization and prioritization of assets and the setting-up of specialised work-
out  teams.  Furthermore,  data  cleansing  processes  are  very  important  for  correct  asset 
pricing  and  for  the  sale  process.  The  files  inherited  from  banks,  including  collateral 
documentation,  need  to  be  reviewed  and  completed  in  case  of  missing  information.  The 
process should engage with numerous specialised experts (surveyors, engineers, attorneys 
etc.) and should not be paid for by the AMC. 

In  addition,  a  bi-annual  quality  assurance  process,  which  might  involve  data  updating, 
cleansing,  re-categorization  and  /  or  re-prioritisation  of  assets,  is  deemed  necessary  in 
order to secure minimum acceptable standards of data quality and ensure data relevance.  

After  transferring  the  assets,  AMCs  are  expected  to  maintain  their  database  up-to-date. 
When  organising  loan  servicing,  AMCs  need  to  ensure  that  they  will  have  access  to  all 
necessary information to maintain the database up-to-date. 

In  addition  to  loan  data,  also  collateral  related  valuation  data  should  be  updated  on  an 
ongoing  basis.  If  there  are  no  liquid  markets  for  loan  or  collateral  values  available, 
valuation  updates  need  to  be  performed  at  least  annually.  This  will  enable  AMCs  to 
perform accurate and timely valuations. 

4.6.4.  Data sharing and transparency 

An AMC is expected to share its data with potential buyers / investors. For this purpose, 
the relevant data templates developed by the EBA for portfolio screening should be used 
to ensure consistency across market participants, therefore setting the market standard and 
widening the investor pool. Clear rules for data sharing must be in place. Data storage will 
have to be done in a way that at no point in time any confidential data can be accessed by 
third  parties.  Processes  for  data  anonymization  shall  be  in  place,  so  that  in  general 
protected data might still be shared with third parties, e.g. for valuation purposes or when 
sharing data with the EU wide transaction platform. 

AMCs  should  be  subject  to  an  approved  Code  of  Practice88,  which  would  set  out  their 
obligations in respect of disclosure of interests and confidentiality. The Code of Practice 
should  be  ratified  by  the  Ministry  of  Finance  and  should  be  adhered  to  strictly.  When 
Member States set up the AMC in national legislation, the provisions of Regulation (EU) 
2016/679 will apply to the processing of personal data. This includes in particular, where 
personal data is processed for the purposes of the Member State legislation setting up the 
AMC, the precise purpose should be specified and the relevant legal basis referenced.89 In 
addition,  personal  data  protection  by  design  and  data  protection  by  default  should  be 

88 I.e. a code or general legal obligation could be sufficient, as for any other seller or investor. AMCs need to be 

bound by these obligations. 

89 The relevant security requirements laid down in Regulation (EU) 2016/679 should be complied with, and the 
principles of necessity, proportionality, purpose limitation and proportionate data retention period respected. 
Equally, administrative cooperation and mutual assistance between the competent authorities of the Member 
States should be compatible with the rules on the protection of personal data laid down in this Regulation, as 
well as in accordance with national data protection rules implementing Union legislation 

59 

 
 
                                                            
embedded in all data processing systems developed and used within the framework of the 
national legislation setting up the AMC. 

The AMCs are also expected, when prompted, to make available the standardised data so 
that  it  could  be  stored  on  a  centralised  platform  at  European  level.  The  centralised 
platform,  in  case  is  developed  in  the  future,  could  combine  exposures  from  multiple 
AMCs and banks and vouch for quality of the data. Similarly, AMCs should provide the 
data  for  the  development  of  a  European  NPL-information  platform  that  would  aim  to 
enhance transparency and facilitate transactions of NPL. 

4.7.  Conditions for bank participation 

One condition to restore a stable and healthy banking sector is that banks are freed from 
NPL  portfolios  (at  least  to  a  large  extent)  to  allow  bank  management  to  focus  on  new 
business and long term growth strategies. In order to achieve this, it needs to be ensured 
that  all  NPLs  are  properly  identified  and  valued,  and  bank  solvency  position  is  tested 
against plausible scenarios from a forward-looking perspective. Where appropriate, banks’ 
participation can be organised based on a qualified mandatory basis. In those cases banks 
deemed by the diagnostic exercise to be in scope of transfer to the AMC may, if deemed 
appropriate,  be  obliged  via  national  legislation  to  transfer  NPLs  falling  within  the 
identified asset perimeter to the AMC. 

Banks  in  scope  would  subsequently  need  to  address  any  shortfalls  vis-à-vis  their 
respective  capital  requirements  resulting  from  the  NPL  disposal  losses.  When  banks  are 
unable to address such shortfalls in private ways (e.g. by raising new equity in the market, 
selling  assets,  etc.),  they  need  State  aid.  This  raises  the  need  for  either,  resolution, 
liquidation.  or  precautionary  recapitalisation  (if  all  applicable  conditions  –  notably 
regarding the bank's  solvency  – are met)90 Although AQRs and stress tests  are time and 
resource consuming exercises which take between 6 to 12 months to conclude, they are a 
precondition for any type of public support for an AMC, as follows from the BRRD and 
the  SRMR.  This  also  contributes  to  avoiding  that  banks,  after  having  received  public 
support, are still struggling with the clean-up of residual NPLs due to the lack of buffers 
and are thus not able to focus on lending to the economy. 

4.8.  Funding 

The  funding  of  the  AMC  could  be  structured  following  the  examples  of  SAREB  and 
NAMA.91  The  AMC  would  acquire  assets  by  issuing  senior  unsecured  bonds  to 
originating  banks.  The  senior  bonds  would  carry  a  full  and  irrevocable  guarantee  of  the 
national  Treasury,  and  would  be  eligible  for  use  as  collateral  in  Eurosystem  credit 
operations by their holders. The bonds will be bullet securities with a call option available 
to the issuer. 

90 See section 3.1. 
91 This does not imply that funding approaches should be limited to those implemented in the cases of NAMA and 

SAREB. Similar, yet alternative, models could be applied, optimally adapted to Member States' specific 
characteristics. This type of funding solution could be structured in compliance with the BRRD and SRMR. 

60 

 
 
                                                            
Market  funding  solutions  without a guarantee  should  be  explored  as  part  of  the  national 
AMC design process and, if feasible, they may be preferred to the government-guaranteed 
funding. However, historical experience indicates that such market-based solutions prove 
difficult  to  implement  and  may  require  a  significantly  larger  equity  contribution,  thus 
being uneconomical. 

The  repayment  schedule  of  the  senior  bonds  would  be  part  of  the  AMC’s  business  plan 
and aligned with the intended asset disposal schedule. A waterfall of repayments would be 
agreed  in  advance.  The  subordinated  bonds  should  only  be  repaid  after  all  senior  bonds 
will  have  been  amortised.  Similarly,  the  equity  should  be  last  to  be  repaid,  after 
redemption of all debt instruments.  

The  senior  bonds  should  be  structured  with  cash  flow  uncertainty  and  liquidity  risk  in 
mind. The AMC is expected to improve cash flow generation over time, as its recoveries 
would come late in its life cycle. However, the contractual maturity of the bonds may need 
to  be  shorter  than  the  expected  lifetime  of  the  AMC  to  minimise  the  total  funding  cost 
paid by the AMC.92 In this case, then transferability of the AMC senior bonds would be, at 
least initially, restricted, to avoid the risk of the AMC being faced with large redemption 
needs. Together with the repayment schedule, the redemption needs would impose market 
discipline from the bondholders’ side.  

A  portion  of  bonds  could  be  subordinated,  the  amount  to  the  calibrated,  with  the  bonds 
being  placed  with  participating  banks  or  with  equity  providers,  with  the  latter  being 
preferable  to  fully  remove  exposure  to  NPL  from  the  banks.  If  subordinated  bonds  are 
placed with transferring banks this would come with the drawback that the banks would 
have a continued dependence of the banks on NPL performance – exactly the dependence 
we  try  to  break  with  the  AMC  in  the  first  place.  On  the  other  hand,  this  residual 
dependence, limited to a small part of the AMC capital structure, can serve as an incentive 
for banks to cooperate with the AMC after the asset transfers are completed, for example 
in the field of loan documentation.93 

The large majority of the funding should consist of senior guaranteed bonds. The equity 
part should be sufficient to cover the expected Day 1 loss related to the initial recognition 
of  assets  at fair  value94  with  a  buffer that  would allow the  AMC  to  work  out  assets  and 
carry  out  the  necessary  hedging  strategy  without  being  at  risk  of  falling  into  negative 
equity. Part of that buffer could be structured as subordinated debt, for example calibrated 
to cover the unexpected loss on the assets.95 

92 In the case of SAREB and NAMA, the bonds have a contractual maturity of one year and are rolled over on a 

periodic basis. 

93 Ex post interaction between banks and the AMC is often a necessity, as quality of loan documentation and data 
often turns out to be poor. Without a financial incentive to do so, banks may not be willing to resolve the data 
issues. A profit-based servicing fee structure would likely be a weak incentive as the banks are going to be only 
a bridge servicer, until an independent servicer can be found (see section 5.3), over the period when the AMC is 
unlikely to generate profits.  

94 See section 4.5. 
95 In that case, it would be natural to place the subordinated bonds with the banks as payment-in-kind. However, 

the subordinated tranche would be subject to a high capital requirement, and may have to be marked down from 

61 

 
 
                                                            
 
The benefit of the payment-in-kind would be that the liquidity needs of the AMC would 
be minimised, as  the  AMC would not  need to raise cash to acquire the assets  and could 
lock  up  the  funding  from  originating  banks.  Additionally,  banks  would  benefit  from 
swapping  a  high-risk  non-performing  asset  for  a  low-risk,  quasi-sovereign  asset  that 
would  improve  their  funding  position  without  tying  up  large  quantities  of  regulatory 
capital, although their balance sheets would not shrink substantially. 

In the start-up period, the AMC may require a bridge loan to cover its initial outlays and 
working  capital  needs.96  This  could  be  provided  by  participating  banks  against  state 
guarantee, and repaid once the AMC generates income. 

The government guarantee would be remunerated in line with the State aid rules. 

The guarantees, being a contingent liability of the government with a remote probability 
of being ever called due to the pricing of asset transfers and a capital cushion of the AMC, 
would not increase the stock of public debt.97 

Appropriate controls must be put in place to ensure that AMC redeems senior debt, rather 
than  building  cash  reserves  or  diverting  resources  to  other  interests.  To  ensure  that  an 
AMC’s  overarching  goal  –  the  timely  wind  down  of  its  portfolio  –  is  achieved  and  not 
diverted,  strict  guidelines  should  be  laid  down  to  ensure  that  an  AMC  reduces  its 
outstanding liabilities at every reasonable opportunity, bearing in mind the natural priority 
of the capital structure, and does not run up large cash buffers. 

4.9. 

Impact on public finances and national accounts 

4.9.1.  Main considerations for sector classification of AMC units 

One of the key questions determining fiscal impact of AMCs is their sector classification 
in  national  accounts.  The  choice  is  between  S.12  (financial  corporations)  and  S.13 
(general government). In national accounts, any given unit can belong to only one sector98 
and, as a general rule, units are not split.  

AMCs  would  be  classified  as  part  of  general  government  when  they  do  not  place 
themselves  at  risk  and  instead  the  government  is  carrying  risks  and  rewards  associated 
with  asset  management  and  the  incurrence  of  liabilities  by  the  AMC.99  The  government 
puts  itself  in  this  position  for  public  policy  purposes,  and  direct  or  indirect  financial 
support  received  by  such  AMCs  implies  a  redistribution  of  income  and  wealth  through 
their  operations,  which  justifies their  classification  inside  general  government.100  If  such 
risks and rewards are instead predominantly with the banking sector, the AMC would be 

face value upon recognition, causing an additional Day 1 loss. Overall, this speaks in favour of limiting the size 
of the subordinated tranche. 

96  It  should  not  be  forgotten  that  an  AMC  should  run  a  positive  cash  balance  to  cover  its  projected  operating 

expenses and smooth the volatility of cash inflows and outflows. 

97 See more detailed discussion on the impact of guarantees on public finances in section 4.9. 
98 ESA 2010: 2.41 
99 ESA 2010: 20.32-20.34, 20.46, 20.243-20.248. 
100 ESA 2010: 20.02.b. 

62 

 
 
                                                                                                                                                                                   
classified  in  the  financial  corporations  sector.  The  balance  of  risks  and  rewards  takes 
predominance  over  formal  characteristics  of  the  AMC:  for  example,  an  AMC  can  be 
classified as part of general government regardless of the fact that it maintains its banking 
licence and is included in the MFI list.101  

4.9.2.  Impact of losses related to impaired assets on government deficit and debt 

The key public finance impact concerns losses from impaired assets: the price that is paid 
by  the  government  upon  acquiring  the  assets  (or  value  of  liabilities  assumed  by 
government in relation to such assets) is to be compared to the market or fair value of the 
assets.  Any  consideration  provided  in  excess  of  market  or  fair  value  of  the  assets  is 
recorded as a deficit-increasing capital transfer.102 However, determining the value of the 
asset  is  often  difficult  in  practice,  particularly  when  there  is  no  representative  or 
functioning market. 

If an AMC is classified inside general government, its operations will be relevant for the 
'Maastricht deficit'  103. The largest impact on deficit usually relates to the set-up of the 
structure  and/or  the  transfer  of  the  assets,  when  the  value  of  cash  provided  by  the 
government or the liabilities assumed by the government exceeds the market or fair value 
of  the  assets.104  If  the  AMC  is  classified  outside  general  government,  government 
guarantees  on  the  (realisation  of  the)  assets  could  have  an  effect  on  public  finances  at 
inception:  when  the  government  guarantee  is  on  any  given  value  (e.g.  nominal  value) 
higher  than  the  estimated  fair  value,  then  a  deficit-increasing  capital  transfer  shall  be 
recorded for the difference.105 Deficit and debt impact are possible also in cases when an 
AMC  is  classified  as  a  financial  corporation  but  some  transactions  and  associated 
liabilities are considered as done or incurred on behalf of the government.106 

The impact of losses does not exclusively occur in the beginning of the process but may 
also crystallise at later stages. In cases when AMCs are classified outside government, it 
can occur for example when government guarantees are called, when government makes 
additional  capital  injections  in  the  company  (see  also  discussion  below),  or  when  a 
government cancels some of the claims related to the impaired assets, beyond what was 
already  recorded  as  having  a  deficit-increasing  impact  in  the  beginning  of  the  process. 
When AMCs are classified inside government, this can occur when further losses on the 
assets are recognized, either due to new estimates or to the resale (or other transformation) 
of those assets. 

101 ESA 2010: 20.32-20.34. 
102 ESA 2010: 20.246-20.247 
103 "Maastricht deficit" or "Excessive Deficit Procedure (EDP) deficit" is defined in Protocol No 12 on the 

Excessive Deficit Procedure attached to the TFEU and in the subsequent legal acts and corresponds to net 
borrowing (net lending) of the general government sector, as defined in the European System of Accounts 
ESA 2010. It is used when assessing Member States' compliance with the requirements of the Stability and 
Growth Pact. 
104 See section 4.10. 
105 ESA 2010: 20.245, 20.256 
106 ESA 2010: 1.78 

63 

 
 
                                                            
The impact on debt of classifying an AMC as part of government is more straightforward, 
due  to  the  gross  nature  of  the  'Maastricht  debt'107:  any  obligation  of  such  an  AMC 
towards units outside general government (e.g. to originating banks) which has a nature of 
deposit, debt security or loan, will add to the government's 'Maastricht debt'.  

Units holding predominantly impaired assets (which are usually referred to as 'defeasance 
structures'  in  statistical  methodology)  show  considerable  heterogeneity  in  what  concerns 
their  legal  and  administrative  features,  the  forms  of  government  support,  their  size  and 
their origin/background. It is clear also that the national context and framework in which 
these  entities  are  created  differs  considerably  from  one  MS  to  another.  It  is  therefore 
important  to  clarify  that  the  statistical  impacts  of  each  case  is  always  separately 
analysed by the Commission (Eurostat). 

4.9.3.  Valuation of assets 

As  a  general  rule,  valuation  in  national  accounts  is  based  on  market  value108,  although 
recording of loans has its specificities. Under normal market conditions it can be assumed 
that market values could be easily established for securities, quoted shares and, to a lesser 
extent,  also  for  real  estate,  whereas  loans  will  be  recorded  in  the  balance  sheet  at  their 
nominal  value109.  In  situations  of  market  distress,  it  is  possible  that  meaningful  market 
value could be difficult to establish. Fair value or expected redemption value of the assets 
has  thus  to  result  from  estimates  carried  out  by  an  independent  body  on  the  basis  of 
usual pricing methods110.  

4.9.4.  Capital injections into banks and apportioned losses 

Government support to financial institutions often takes the form of acquisition of equity 
or  other  forms  of  (regulatory)  capital.  When  determining  the  impact  on  public  finances, 
the main criterion is that payments to cover accumulated, exceptional or future losses, or 
provided  for  public  policy  purposes,  are  recorded  as  capital  transfers  (with  deficit 
impact).  As a secondary criterion, when a government is  acting  as  a normal shareholder 
(in the sense that it has a valid expectation of earning a sufficient rate of return), payments 
are  recorded  as  acquisition  of  equity  (without  deficit  impact).111  Sometimes  capital 
injections are combinations of the two above-mentioned forms of transactions.  

The  application  of  these  principles,  however,  poses  practical  difficulties  when  capital 
injections  are  made  into  corporations  under  restructuring  or  recapitalisation,  i.e.  when 
forward-looking  considerations  of  future  rate  of  return  coincide  with  past  losses.  To 

107 "Maastricht debt" or "Excessive Deficit Procedure (EDP) debt" is defined in Protocol No 12 on the Excessive 

Deficit Procedure attached to the TFEU and in the subsequent legal acts and corresponds to total general 
government's consolidated gross debt at nominal value outstanding at the end of the year, constituted by the 
liabilities of general government in the following categories: currency and deposits, debt securities and loans, as 
defined in the European System of Accounts ESA 2010. It is used when assessing Member States' compliance 
with the requirements of the Stability and Growth Pact.  

108 ESA 2010: 1.94 
109 ESA 2010: 7.70 
110 Manual on Government Deficit and Debt: IV.5.2.3-IV.5.2.5 
111 ESA 2010: 20.198-20.199 

64 

 
 
                                                            
address this, Eurostat proposed an implementation rule of 'apportioned losses': part of the 
capital injection which corresponds to government's share in accumulated past losses is in 
any case to be recorded as a capital transfer (with deficit impact), while for the remaining 
amount  usual  considerations  of  sufficient  rate  of  return  and  other  arguments  (e.g. 
participation of private investors) apply when determining the nature of the transaction. 

4.10.  Safeguard mechanisms and supervision 

4.10.1. Safeguard mechanisms introduction 

Safeguard mechanisms aim to protect the taxpayers against future liabilities created by an 
AMC  if  it  does  not  perform  financially  or  drifts  from  its  mandate.  Historically  the 
importance of these mechanisms has been more evident in countries with weak legal and 
institutional environments, especially when financial community cannot thoroughly assess 
the  performance  of  an  AMC  or  weak  governance  is  predominant.  An  AMC  should 
consider implementing the following safeguard mechanisms: 

(1) Time limits: in order to ensure that the AMC acts expeditiously; 
(2) Financial: to avoid that an AMC becomes a fiscal burden; 
(3) Risk management: to ensure prudent risk management practices; 
(4) Other Safeguard Mechanisms: to ensure that best market practices are followed. 

There  may  be  a  trade-off  between  a  fully-fledged  implementation  of  safeguard 
mechanisms  and  the  effectiveness  of  an  AMC.  Therefore  a  thorough  cost-benefit 
assessment should be performed before deciding the implementation of such mechanisms. 

4.10.2. Time-limit safeguards 

Time-limit safeguard mechanisms secure that an AMC’s management remains focused on 
its goal and that the AMC does not drift from its mandate. The temporary character of the 
AMC,  according  to  State  aid  rules,  requires  the  AMC  to  have  a  predefined  lifespan. 
However, past experience has proven that flexibility to extend the lifespan, under certain 
conditions, is an important success factor for AMCs. A sunset clause, as clearly defined in 
the  AMC’s  business  plan,  is  necessary  to  ensure  the  temporary  character  of  the  AMC. 
However,  it  should  be  possible  to  differentiate  the  foreseen  lifespan  of  the  AMC  (to  a 
shortened  or  lengthened  period),  in  order  to  enable  tailoring  to  varying  specifics  across 
countries and/or asset classes. This would allow the AMC's management to accommodate, 
if necessary, relevant market development and would also ensure that the AMC does not 
act under pressure to sell its assets (subsequently leading to fire sales). Nevertheless, the 
decision  to  alternate  from  the  suggested  lifespan  should  be  duly  justified  by  the  AMC 
management. 

More importantly, the time to purchase assets should be limited and the AMC should be 
strictly  constrained  to  perform  periodic  acquisitions.  The  time-limit  to  purchase  assets 
reinforces  the  focus  of  the  AMC  on  the  core  work  of  its  operations.  It  simultaneously 
sends a strong message to banking institutions to immediately offload the relevant assets. 

65 

 
 
Furthermore,  it  ensures  that  sound  loan  origination  and  risk  management  will  not  be 
impaired by the expectations of subsequent asset transfers to the AMC. 

4.10.3. Financial safeguards 

Financial  safeguards  can  be  considered  in  order  to  avoid  an  AMC  becoming  a  fiscal 
burden  and  they  are  mostly  relevant  when  external  controls  are  weak.  Where  the  local 
financial  community  and  external  controllers  can  assess  appropriately  the  role  of  the 
AMC, then financial safeguards may not be necessary. 

However,  when  the  financial  community  and  external  controllers  do  not  have  the 
necessary  capacity  and  therefore  cannot  assess  appropriately,  the  following  financial 
safeguards could be put in place. The size of the AMC could be capped at inception with 
an overall limit on the total issued debt or total borrowing, securing the focus remains on 
the AMC’s mandate. Yet, the AMC's size should stay consistent with the targeted critical 
mass  of  NPL.  However,  such  limits  entail  risks  in  case  they  are  violated,  potentially 
leading  the  AMC  to  lose  credibility.  In  order  to  protect  the  credibility  of  the  AMC,  the 
imposed  limits  should  be  strictly  respected  and  adhered  to.  Other  ways  of  financial 
safeguards for an AMC would be to restrict the use of cash through sinking funds for the 
issued bonds, and/or set up repayment clauses and to promote financial transparency. 

4.10.4. Risk management safeguards 

As  a  result  of  its  operations,  an  AMC  is  exposed  to  credit,  interest  rate,  liquidity  and 
possibly currency rate risks. The AMC needs to carry out an in-depth analysis to identify 
the  most  relevant  risk  factors  in  order  to  support  its  decision-making.  A  separate  and 
independent  risk  management  unit  that  should  be  reporting  directly  to  the  board  of 
directors  is  required  to  perform  this  task.  Risk  management  safeguards  aim  to  limit  risk 
tolerance and set lower levels on accepted market (e.g. interest rate and foreign currency 
risks (i.e. open positions)), credit and liquidity risks. 

Changes in interest rates and exchange rates or other market prices result in market risk, 
which is the potential loss in the income or net worth of the AMC. Market risks arise from 
open positions in interest rates and currency products. Currency risks arise when the AMC 
acquires  foreign  currency  loans,  which  create  asset/liability  mismatches.  The  AMC  also 
faces ongoing currency risks after loan acquisition as non-domestic currency facilities are 
drawn,  repaid  or  rescheduled  and  assets  are  disposed.  An  AMC  should  utilise  currency-
hedging practices using derivative contracts to mitigate or manage the currency risk. The 
AMC is also exposed to interest rate risks due to issued bonds, acquired loans and booked 
derivatives. The assessment and management of the interest rate risk is related to current 
and  expected  performance  of  the  loan  or  derivative  book.  The  AMC  should  therefore 
manage interest rate risk by utilising hedging practices through derivative contracts. 

As  the  AMC's  financial  asset  portfolio  represents  the  majority  of  its  assets  under 
management,  the  assessment  and  management  of  credit  risk  is  crucial  for  the  AMC  to 
meet its mandate. 

66 

 
 
Further  to  this,  liquidity  risk  needs  to  be  actively  managed,  which  may  incorporate 
ongoing liquidity stress-testing and the maintenance of a minimum liquidity buffer or cash 
reserves. The buffer should be kept in line with the overall asset and liability management 
strategy. 

4.10.5. Other safeguard mechanisms 

Mechanisms are required to safeguard that the staffing of the AMC is done purely on the 
basis  of  merit  and  that  the  staff's  remuneration  remains  at  market  prices.  It  should  be 
possible  to  provide  incentive  based  remuneration  schemes  but  these  should  follow  best 
market  practices.  Safeguard  Mechanisms  for  the  asset  valuation  should  ensure  fair  and 
appropriate respective processes are carried out.  

4.10.6. Supervision 

An AMC would not need to attract any deposits or issue new loans. It is therefore deemed 
unnecessary  for  it  to  obtain  a  banking  license  and  adhering  to  banking  supervisory 
regulations. The AMC would hence be considered neither as a credit institution, nor as an 
investment firm. It would subsequently not be subject to CRR/CRD supervision. 

However,  even  though  the  AMC  will  not  be  under  national  banking  supervision 
(competent authority), it still needs proper oversight. The institution that is to provide this 
oversight  function  would  need  to  be  identified  by  the  government  under  whose 
jurisdiction the AMC would be set up. Entities which might be nominated for this purpose 
for  prudential 
(in 
supervision/resolution, the Central Bank, Comptroller’s office / court of auditors or a joint 
oversight  committee  of  these  authorities.  In  addition,  if  public  funding  is  at  stake,  an 
observer function for the European authorities could be considered. 

the  Competent  Authority 

supervisor)  are 

following: 

the 

The  supervisor  should  be  well  equipped  and  should  possess  sufficient  expertise  to 
adequately  and  efficiently  supervise  an  AMC.  An  AMC  needs  to  be  subject  to 
independent  oversight  in  order  to  further  strengthen  its  governance.  However,  oversight 
should  be  strictly  limited  to  compliance  with  regulation  and  the  AMC’s  mandate  and 
should  not  imply  powers  to  change  or  challenge  business  decisions.  The  scope  of 
supervision by the designated competent authority should include, for instance, the review 
of the business plan of the AMC as well as the compliance of the AMC with accounting 
rules and governance requirements. 

67 

 
 
V.  EFFECTIVE OPERATIONS OF AN AMC 

5.1.  Organisation and staffing, internal controls and transparency 

The mandate of the AMC should account for the fact that AMCs should not operate as a 
for-profit  enterprise.112  AMCs  should  remain  a  light  operation,  with  limited  numbers  of 
staff. Within the constraints mentioned above, AMCs should be able to adjust staffing as 
needed during its lifetime. It should also be able to pay market price for specialised skills 
needed in the work-out process. In particular, it should not aim to develop its own heavy 
servicing  platforms,  with  a  possible  exception  for  single  large,  bespoke  exposures  that 
merit special senior management attention and demand complex expertise. 

Rigorous, best practice internal controls must be in place to secure the financial soundness 
of the AMC and to maintain the entities credibility. These controls should be established 
to  cover  all  commercial  aspects  of  the  AMCs  governance  and  operations.  A  strong 
legislative  mandate  can  only  be  harnessed  through  effective  operational  control,  to 
mitigate  operational  risks  arising.  Audits  of  control  functions  should  be  conducted  by 
external  auditors  with  shortcomings  immediately  addressed.  Control  functions  should  be 
tailored  to  the  specific  nature  of  the  AMC  enterprise  and  some  aspects  should  even  be 
entered into the relevant legislation. These aspects are related to, for example, prevention 
of external interference with the operations of the AMC. In the case of NAMA, lobbying 
was  considered  an  offence,  and  staff  were  under  an  obligation  to  report  any  attempts  to 
lobby NAMA to the proper authorities. 

AMCs  should  be  transparent  to  the  public  with  well-defined  disclosure  requirements. 
Transparency will be critical in the implementation phase, where it must be demonstrated 
that asset perimeters, participation perimeters and transfer pricing are rules-based on not 
subject to  possible corruption or  cronyism. Later,  public interest  will shift to  operations, 
focusing the disposal of assets and the consistent treatment of debtors, and to the financial 
performance of the AMC. 

5.2.  Strategic planning, asset and financial management 

5.2.1. Strategic planning 

The strategic plan is the most important part of defining operations of an AMC. A general 
strategic  plan  should  be  designed  for  an  AMC’s  entire  life  with  the  possibility  of 
reviewing and fine-tuning it rather than completely revising it. This part of the plan should 
be finished to a large extent before the establishment of an AMC. An AMC should have a 
mechanism in place to decide on the strategy of the AMC. All strategic planning decisions 
need  to  be  communicated  throughout  the  organisation  with  clarity.  A  more  detailed 
strategic plan is defined by the management at a later stage. 

112 The AMC's main objective should be to maximise the value of assets that it is endowed with. For more details, 

see section 4.1. 

68 

 
 
                                                            
The three most important parts of a strategic plan are: 

  Setting an objective with the consideration of the mandate; 
  Selecting an approach for reaching the objectives and; 
  Assessing performance and reviewing the whole process (strategic plan review). 

Effective governance is one of the key parameters for the successful implementation of the 
strategic planning. Therefore, it is of the highest importance to communicate the adopted 
plan  within  the  AMC  with  the  purpose  of  educating  the  staff  about  the  goals  of  the 
organisation.  In  addition,  transparency  with  the  general  public  and  other  stakeholders 
about the strategic plan is also very important in order to gain public support.113 

i.  Objective of an AMC 

The main objective of an AMC is to maximise recovery value deriving from the disposal 
and  management  of  the  assets  transferred  to  the  AMC,  while  considering  a  number  of 
constraints.  First,  the  recoveries  have  to  be  maximised  given  the  country-specific 
operating  environment.  Second,  the  performance  of  the  AMC  has  to  be  measured  in  the 
context  of  the  appropriate  timeframe.  Finally,  during the sale  and  work-out  of  NPLs  for 
AMCs dealing mainly with household and small enterprise loans, the social aspect should 
be appropriately considered. Above all, borrowers should be treated fairly. 

ii.  Approach for meeting the objectives 

Selecting an approach for reaching the objectives depends on a number of factors. The two 
most  important  ones  are  mentioned  above:  operating  environment  and  timeframe.  The 
macro-economic outlook plays an important role in both factors and hence in selecting the 
approach.  The  best  way  to  forecast  the  macroeconomic  developments  is  to  look  at  the 
position in the economic cycle. Depending on this position, the most suitable approach is 
chosen for a specific asset class and a specific country/region. 

Factory vs warehouse approach 

There  are  two  main  general  approaches  in  dealing  with  assets:  the  warehouse  approach 
(“wait  and  sell”)  and  the  factory  approach  (“repair  and  sell”).  The  first  approach  relies 
mostly  on  time  in  order  for  assets  to  recover  in  value.114  It  is  therefore  the  best  option 
when  the  economy  is  in  its  initial  upswing  (i.e.  early  boom  cycle).  If  there  is  no  visible 
near-term growth, which is often the case, the factory approach is more suitable. 

Fast disposal vs slow disposal  

Another  dimension  in  the  disposal  process  is  the  speed  of  disposal  of  assets.  Highly 
capital-intensive  assets  should  be  fixed  (restructured  or  hedged)  and  sold  as  soon  as 
possible.115  Alternatively,  for  medium-term  performing  assets  that  are  not  very  capital-
consuming (illiquid long-dated assets or assets for which fixing and/or sale costs would be 

113 Cerruti and Neyens, 2016 
114 Medina and Peresa, 2016 
115 Medina and Peresa, 2016 

69 

 
 
                                                            
prohibitively  high),  it  is  better  to  wait  with  the  sale.  In  addition,  quick  disposal  of  large 
volumes of assets might trigger a fire sale and destabilise the secondary market for NPLs 
and banks dependent on sales therein.  
For  this  reason,  before  deciding  on  the  speed  of  disposal  AMC,  the  following 
characteristics across asset classes should be carefully considered: 

liquidity of the market for specific assets; 

-  capital intensity; 
- 
-  cost of repair/restructuring/sale; 
-  volume compared to the market. 

Figure 8: Economic cycle and disposal approach 

Sale channels and marketing  

AMCs  should  be  perceived  as  easily  approachable,  flexible  and  transparent  sellers  of 
NPLs. AMCs should therefore develop platforms to  enable window-shopping and  initial 
screening  by  potential  investors.  These  platforms  should  share  initial  screening  data  for 
raising  interest  with  investors,  who  would  then  engage  bilaterally  with  the  AMC  for 
receiving  information  in  order  to  perform  a  full  due-diligence.  Such  platforms  would 
enable the build-up of portfolios, sale of assets in packages, securitisation or disposal of 
single loans. 

iii.  Performance assessment and review of the strategic plan 

The  performance  of  the  AMC  should  be  assessed  regularly  in  order  to  evaluate  the 
adequacy of the strategic plan and effectiveness of its execution. The strategic plan should 
be set in multiple stages, preferably by defining the number of years for each stage. For 
each  stage,  a  milestone  should  be  set,  ideally  by  setting  a  threshold  of  disposed  assets. 
Together  with  profit  generation  (also  measured  in  recovery  percentage),  disposal  speed 
will be the main performance measure.  

70 

WAREHOUSEAPPROACH"Wait and sell" an early upswingWAREHOUSE APPROACH"Wait and sell" in an early upswingFACTORYAPPROACH"Repair and sell" in a downturn and bottomof the cycleECONOMICGROWTHTIME 
 
 
Key performance indicators for assessing the success of the strategy should consider the 
operational  environment  and  the  deadline  objectives.  As  such,  performance  could  be 
measured  by  considering  the  speed  of  disposal  and  the  profit/recovery  percentage  given 
the operating environment and social benefits. A clear performance measurement should 
be  established  in  order  to  avoid  the  interference  of  external  parties,  especially  as 
mechanisms against political interference. 

Strategic plans should be reviewed annually in conjunction with annual business plans and 
revised  only  if  the  underlying  fundamentals  of  the  business  or  the  macroeconomic 
scenario change.116 

5.2.2. Asset and financial management 

i.  Asset management 

The main part of the asset management process is choosing the adequate disposal strategy 
for NPLs. Servicing of assets represents an important part therein. 

Disposal strategies 

AMCs have a mix of disposal strategies available to them. The first step in defining the 
possible  spectre  of  solutions  is  identifying  the  viability  of  the  borrower  (either  going  or 
gone  concern).  Depending  on  the  nature  of  the  assets  managed,  the  urgency  of  cash 
generation, and their life span, AMCs can choose between five main disposal strategies: 

Insolvency proceeding and liquidation; 

-  Foreclosure and sale of collateral; 
- 
-  Sale of the loan; 
-  Restructuring (traditional, debt-to equity swap); 
-  Out-of-court arrangements (and quick recovery programmes). 

116 Cerruti and Neyens, 2016 

71 

 
 
                                                            
Figure 9: Loan restructuring process 

Source: World Bank 

The  adequacy  of  disposal  strategies  also  depends  on  the  asset  class  and  the  geography, 
where the loan is located. 

Synergies and cooperation between AMCs 

In case of multiple AMCs, there is a possibility of synergies, especially in view of the sale 
and underwriting process. This can be done through a common sale platform or data hub 
for sharing information. The biggest benefit of such cooperation is to increase the volume 
of available assets for big investors and to take advantage of economies of scale in dealing 
with  information.  Additionally,  cross-border  investors  have  facilitated  access  to  data, 
hence potentially encouraging cross-border disposal of assets. 

ii. 

Financial management of an AMC  

Most of the financial management of an AMC is connected to cost control. Similar to the 
assessment  of  profitability,  the  efficiency  has  to  be  monitored  and  scrutinised  through  a 
set of key performance indicators. 

In the process of allocating resources for specific operational processes, the AMC should 
consider outsourcing certain activities, if: 

- 
- 
- 
- 

it is a one-off process; 
the process is capital intensive; 
there is no potential in reaching economy of scale internally; 
there is no internal knowledge in the specific field.  

A very important part of financial management of an AMC is public disclosure. In order 
to build up public support, the AMC should strive to be transparent as to how it spends its 
resources.  Going  beyond  regular  reporting  disclosures,  the  AMC  also  needs  to 

72 

 
 
 
communicate  clearly  externally  about  efforts  to  keep  cost-management  (and  the  AMC 
itself) as efficient as possible.  

5.3. 

Interaction with transferring banks 

To address moral hazard, banks need to share the potential losses that an AMC might face 
(at least in part). This should be achieved through a possession of AMC shares by banks 
participating  on  a  qualified  mandatory  basis.117  There  should  be  no  interaction  or 
clawbacks  after  the  transfer  in  order  to  ensure  an  effective  risk  transfer.  Solutions  that 
envisage  a  securitisation  process  should  fulfil  the  prudential  conditions  under  which  a 
significant risk transfer is recognised and the assets transferred to the securitisation vehicle 
are considered as deconsolidated.118 

Solutions  that  include  clawbacks  or  requesting  participating  banks  to  provide  collateral 
would create several problems and should be avoided. Most notably either the clawback is 
inefficient, meaning the public funds remain exposed to a failure of the transferring bank, 
or  the  very  purpose  of  the  transfer  of  NPLs  into  the  AMC  is  defeated.  The  bank  would 
then remain exposed to further losses on the AMC portfolio. Hence, clawback provisions 
create  a  contingent  liability.  If  this  liability  is  put  on  the  bank’s  balance  sheet,  the  NPL 
transfer is not definitively eliminating the risk from the bank’s balance sheet but is merely 
shifting it from the asset side to the liability side of the balance sheet.119  

Furthermore,  requesting  banks  to  provide  collateral  against  future  losses  would  raise 
issues in the context of the valuation of these assets and the market volatility at which the 
bank  would  expose  itself  or  the  assets  (if  listed).  Another  key  issue  with  clawback 
solutions is the governance and timing  regarding the valuation decision (with clawbacks 
legal risks would be increased). Hence, it should be a direct transfer taking the bank out of 
the decisions / activities post-transfer. 

Lastly, if possible, originating banks should not be involved in the servicing of the loans 
beyond  a  certain  interim  period,  as  they  are  faced  with  an  inherent  conflict  of  interest, 
holding similar assets themselves.120 However, in case the AMC would need to be set up 
quickly leaving it without sufficient time for the selection of external asset servicers, the 
loan  servicing  agreements  with  the  originating  banks  should  include  appropriate 
provisions  to  incentivize  these  banks  to  ensure  a  proper  management  of  their  assets 
transferred to the AMC. Moreover, one of the underlying reasons to transfer the loans to 
the AMC is that those originating banks could concentrate on the lending activity. 

117 See section 4.7.  
118 Regulation (EU) No 575/2013 of the European Parliament and of the Council sets out the conditions under 
which a significant risk transfer (‘SRT’) by an originator institution is recognised. Furthermore, the EBA 
Guidelines on Significant Credit Risk Transfer (EBA/GL/2014/05) and the ECB Public guidance on the 
recognition of significant credit risk transfer provide further details on the recognition process. 

119 See Martin Hellwig – March 2017 Carving out legacy assets: a successful tool for bank restructuring?  

(Scrutiny paper on the SRM provided at the request of the ECON)  

120 Leaving NPL management with the original credit institutions, the latter would logically tend to prioritise their 

own NPLs over the distressed assets owned by the AMC. 

73 

 
 
                                                            
5.4.  Options regarding loan servicing 

AMCs  may  decide  either  to  service  the  loans  in-house  or  to  outsource  to  independent 
external  servicers.  AMCs  should  be  free  to  choose  the  option  that  adapts  better  to  the 
maturity  of  the  servicing  market  and  their  particular  mandate.  However,  in-house  loan 
servicing  encounters  some  challenges  such  as  the  AMC's  potential  lack  of  expertise, 
know-how of the market as a newly incorporated entity or even high upfront costs due to 
the  need  to  hire  specialised  staff  in  asset  management  and  disposal.  Moreover,  AMCs 
should  keep  operational  overheads  as  light  as  possible.  Although  it  may  deliver 
advantages in terms of economies of scale, in-house servicing also requires more internal 
resources,  capacity  and  staff.  Alternatively,  if  the  AMC  outsources  to  independent 
servicers  pure  servicing  activities,  it  would  allow  them  to  focus  on  the  analysis  of  the 
underlying  exposure  and  decision-making.  Therefore,  the  AMC  should  be  able  to 
outsource  services  to  independent  providers  at  market  prices.  Wherever  independent 
servicing capacity in the market is deemed insufficient, in particular due to the existence 
of certain barriers to entry (e.g. for foreign asset servicers), reforms should be enacted in 
order to enable the build-up of the servicing industry. 

Despite  the  payment  of  servicing  fees,  AMCs  are  in  a  strong  bargaining  position  to 
negotiate  the  terms  and  conditions  of  the  assets  servicing  agreements  with  third  party 
servicers.  This  should  ensure  that  the  third  party  servicer  aligns  with  the  objectives  and 
particular  circumstances  of  the  AMC  such  as  the  temporal  mandate  and  the  eventual 
transfer of the loans to (foreign) investors.  

By  requiring  external  servicers  with  aligned  incentives  to  manage  the  NPLs,  the  AMC 
would  generate  strong  incentives  for  the  development  of  the  servicing  industry.121  The 
inherent  economies  of  scale  of  the  AMCs  should  also  attract  (additional)  third  party 
servicers that are eager to work out the underlying assets to the best interest thereof. This 
may encourage the specialization of credit institutions that wish to concentrate on lending 
activities. In addition, it also contributes to the overall development of secondary markets 
as a whole, as it should attract more foreign investors that can rely on and trust sufficient 
local servicing capacity and expertise to manage the pool of loans. This growth in demand 
should  also  have  positive  effects  on  the  AMC's  mandate  to  sell  the  loans  within  the 
lifespan of the vehicle.  

To  the  extent  possible,  the  servicing  of  the  loans  should  be  performed  without  the 
involvement  of  the  originating  banks  –  as  they  are  faced  with  an  inherent  conflict  of 
interest,  holding  similar  assets  themselves  –  at  least  beyond  a  certain  interim  period.122 
Only  if  no  other  options  exist,  and  where  banks  can  demonstrate  that  the  conflict  of 
interest  is  well  managed  (e.g.  through  Chinese  walls),  servicing  by  banks  may  be 
considered  as  a  bridge  solution  until  capacity  is  established  in  the  market.  The  cost  of 
servicing should be factored into the transfer prices of the assets, and should not be passed 
through  to  banks,  as  that  would  weaken  the  incentive  of  the  AMC  management  to 
accelerate recoveries and to discipline the servicers. 

121 A clear positive example is the case of Spain after the creation of SAREB. 
122 For more details, see also section 5.3 (Interaction with transferring banks). 

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Instead  of  relying  on  the  originating  banks,  independent  servicers  may  specialize  to 
provide  more  efficient  and  targeted  services  to  the  AMC.  Consequently,  servicers  could 
focus on debt collection, distribution of payments or other activities offering a wide range 
of  options  to  the  AMCs  (activity  segmentation).  Likewise,  the  AMC  could  look  for 
servicers  specialized  on  consumer  credit,  SMEs  loans  or  mortgage  loans  (type  of  loans 
segmentation).  Lastly,  AMCs  could  outsource  loans  based  on  whether  the  collateralized 
assets are located in some particular areas (geographical segmentation). 

5.5.  Closing the AMC 

The lifespan of the AMC should be finite, and defined in  its business plan. It should be 
realistic,  but  challenging,  to  reduce  room  for  complacency  and  intransigence,  and  to 
maintain  pressure  on  management  to  reduce  assets.  At  the  same  time,  an  AMC  should 
have some flexibility in its lifespan123, to react to emerging developments, to allow it fulfil 
its  primary  mandate  (maximisation  of  asset  values)  and  based  on  the  fundamental 
rationale of an AMC: to bridge intertemporal pricing gaps. Criteria for flexibly deviating 
from the planned lifespan should be set down out the outset of operations. 

Executive  incentives  should  be  provided  to  strengthen  the  determination  of  the  AMC’s 
management  to  meet  the  deadlines,  however,  without  creating  an  excessive  pressure  for 
asset  resolution  ahead  of  the  target.  A  not-for-profit  enterprise  may  aide  in  these 
incentives. 

The  legislation  should  not  provide  any  opportunities  to  refocus  the  AMC  towards  a 
different  business  model,  to  prolong  its  lifespan  beyond  what  is  strictly  necessary  to 
resolve  the  assets,  or  to  reopen  the  AMC  to  later  asset  transfers.  An  initial  horizon  of  a 
pre-determined  amount  of  years124  would  need  to  be  set  at  the  outset,  with  a  clear  and 
measurable  path  towards  wind-down,  specified  in  the  business  plan,  contingent  upon 
reasonable  assumptions  about  key  parameters  of  baseline  macroeconomic  and  asset 
recovery scenarios. 

An AMC will shed staff as it shrinks and approaches expiry. For this reason and others, it 
may be considered to sell the AMC rump – the remaining portion of its residual assets – 
for efficiency reasons, so that operations can be wound up, rather than carried on for the 
purposes of managing a small portfolio. 

123 Subject to certain restrictions, i.e. no new business model and no prolongation beyond what is strictly 

necessary. 

124 The appropriate lifespan may differ, depending on the type of assets and the Member State's specific context. 
Nevertheless, a pre-set, reasonable timespan also underlines that the value of the NPLs and the underlying 
collateral will only decrease over time. An economic recovery could deliver an uplift. However, waiting longer 
than, e.g., 10 years for such a recovery to take place is not sensible either, since by that time it is unlikely that 
the AMC would be able to retrieve the loss in recovery value. 

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ANNEX:  OVERVIEW OF AID-FREE IMPAIRED ASSET RELIEF MEASURES 

ALTERNATIVE TO CENTRALISED AMCS 

Depending  on  the  specific  impaired  asset  situation  faced  by  a  Member  State, authorities 
may consider a range of possible measures, either tailor-made for each bank or addressing 
the  NPL  problem  of  several  banks.  As  explained  in  section  3.3  of  this  blueprint,  a 
centralised  AMC  is  the  appropriate  tool  to  deal  with  impaired  assets  under  certain 
conditions. However, where those conditions are not met or where such an AMC does not 
have  a  clear  comparative  advantage,  other  impaired  assets  measures  can  be  considered. 
Such  measures  can  both  be  alternatives  and  complements  for  centralised  AMCs. 
Furthermore, Member States may also prefer measures that do not qualify as State aid, the 
latter occurring when the State is charging a market conform price for its intervention. In 
such cases, the compatibility conditions laid down in the State aid rules and the BRRD are 
not applicable.  

In  the  remainder  of  this  annex,  two  types  of  aid-free  impaired  assets  measures  recently 
implemented  by  Member  States  will  be  discussed.  In  particular,  it  concerns  respectively 
an  NPL  securitisation  enabled  by  a  market-conform  State  guarantee  and  an  aid-free 
transfer of NPLs to a bank-specific AMC. The Commission has however also authorised 
social  measures  in  the  form  of  public  support  to  defaulted  borrowers  to  help  them 
repaying their loans and thereby avoid foreclosure. If the indirect advantage to the banks is 
strictly limited, such support does not qualify as extraordinary public financial support in 
the meaning of the BRRD as  was the case  for a Cypriot grant scheme to  borrowers and 
micro-companies.125 

When comparing the various impaired assets measures, it should be kept in mind that the 
suitability  of  a  measure  for  a  specific  situation  depends  on  the  policy  objectives  that 
should  be  achieved  and  the  operational  constraints  (e.g.  timing,  budget,  available 
expertise, etc.). Therefore, while this overview attempts to provide a high-level description 
of  the  respective  measures,  outlining  their  pros  and  cons,  and  referring  to  specific 
examples  (in  the  boxes)  there  is  no  one-size-fits-all  approach.  It  is  up  to  each  Member 
State  to  decide,  in  light  of  the  type  of  impaired  assets,  the  available  financial  and  other 
resources, and the national and EU legal frameworks, which measure(s) are most suitable 
for their situation. 

NPL securitisation enabled by a market-conform State guarantee  

a. Description: high-level explanation of the measure  

In  a  securitisation,  NPL  portfolios  are  transferred  to  special  purpose  vehicles  (SPVs) 
which securitise them. This transfer can take place either at market value or above (up to 
the REV of the assets). The asset side of the SPVs' balance sheets contains the NPLs while 
their liability side would typically consist of an equity tranche and several debt tranches. 
These tranches (with different seniority) are then placed with investors. The involvement 
of the State to facilitate such a measure can consist of the public authorities guaranteeing 

125 See Commission decision of 28.06.2016 in case SA.45004 (2016/N), OJ C 302 of 19.08.2016, p. 1. 

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or  funding  certain  tranches  of  the  SPV.  The  State  can  for  instance  finance  the  equity 
tranche of the SPV and/or guarantee the junior debt tranches. This usually helps drawing 
in private investors for the more senior debt tranches. However, the State may also choose 
to guarantee only the senior debt tranches leaving the riskier parts for private investors. In 
general,  the  State  may  prefer  to  provide  guarantees  rather  than  funding  in  order  to 
minimize the direct impact on the State budget. In addition, it will be easier to demonstrate 
that  a  State  guarantee  of  senior  debt  tranches  is  market-conform  and  hence  free  of  aid 
compared to the State guaranteeing junior debt tranches or funding equity tranches. 

b. State aid and BRRD considerations 

The  State  guarantees  for  securitisation  schemes  can  be  free  of  State  aid  provided  that  a 
market-conform  guarantee  fee  is  paid  and  that  the  other  conditions  laid  down  in  the 
Commission's  Guarantee  Notice126  are  complied  with.  In  order  to  determine  a  market-
conform  guarantee  fee,  the  risk  taken  by  the  State  must  be  assessed  and  comparable 
market  transactions  or  benchmarks  should  be  used.  For  the  risk  assessment,  the 
Commission normally requires a credit rating by an independent rating agency. 

c. Pros and cons  

PROs 

CONs 

The securitisation is transforming illiquid 
NPL into a type of securities which a wider 
variety of market investors can purchase 

When applied for smaller and older vintage 
portfolios: less scope for economies of scale & 
higher funding costs 

Range of NPLs that can be securitized is 
wide and can be done also for smaller NPL 
portfolios 

Direct budgetary impact for State is limited 

Requires more due diligence by investors and by 
rating agency, which could be a challenge for 
smaller banks with the absence of detailed loan 
portfolio data and weaker NPL servicing quality. 

The bank has to outright recognise the losses 
implied by the impaired assets sale to the SPV 
(depends on transfer price) 

d. A practical example 

Box 1 describes how in Italy the securitisation of NPLs is facilitated through the "GACS" 
State  guarantee  scheme.  This  guarantee  scheme  is  set  up  so  as  to  not  involve  State  aid 
through the payment by the SPVs of market-conform guarantee fees. Since that measure is 
free of aid, it also does not trigger the conditionality provided for under the EU's State aid 
and bank resolution rules. Of course, it does not generate an advantage to the participating 
banks equivalent to that of a state measure containing State aid.  

126 Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of 

guarantees (2008/C 155/02) 

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Aid-free transfer of NPLs to a bank-specific AMC  

a. Description: high-level explanation of the measure  

When a bank faces distress due to a sharp deterioration of a specific and limited portfolio 
(e.g. a specific type of assets or assets related to a particular geographical area), one way 
to  provide  relief  is  to  set  up  an  ad-hoc  AMC  that  carves  out  the  impaired  assets  of  the 
bank's balance sheet and to work them out. This eliminates the uncertainty concerning the 
real value of those assets and facilitates restoration of access to the funding market by the 
bank.  If  the  State-supported (or  State-owned)  AMC  acquires  the impaired  assets  at  their 
estimated market value, there is no State aid to the bank selling those assets. As regards 
the management and servicing of the sold assets, it can be carried out by the AMC itself, 
by a third party provider or – only when the assets are sold at market price as is the case in 
an aid-free transaction – outsourced by the AMC back to the selling bank. 

b. State aid/BRRD considerations and other practical issues 

The State can choose to partially or fully fund this type of AMC or guarantee its funding 
raised on the market. Since the AMC purchases the impaired assets at market prices, this 
transaction does not entail any State aid to the bank. As a result, this type of transaction is 
neither subject to the BRRD nor to the State aid compatibility requirements. 

c. Pros and cons  

PROs 

CONs 

Designed to take over any type of asset 
class and granularity 

Depending on the State’s involvement in the AMC, 
there may be an immediate negative impact on the 
State budget or debt.  

Improves asset quality and reduces bank 
funding cost 

Setting up an ad hoc AMC may take time and it may 
not have the needed expertise to manage the assets. 

Enables the institution to resume the 
normal course of its business and improve 
its profitability going forward 

The bank has to outright recognise the losses 
implied by the upfront sale of the impaired assets  

d. A practical example 

Box  2  presents  the  recent  example  of  the  transfer  of  impaired  shipping  loans  from  the 
German bank HSH Nordbank at market price to a dedicated public vehicle.  

Another  example  is  the  Hungarian  asset  management  company  MARK127,  to  which 
solvent financial institutions in Hungary can, on a voluntary basis, decide to sell at market 
price  a  specific  pool  of  non-performing  loans  backed  by  commercial  real  estate.  The 
Commission's  assessment  showed  that  MARK's  methodology  to  determine  the  transfer 
price will ensure a market conform valuation and therefore the measure is free of State aid.  

127 See Commission decision of 10.02.2016 in case SA.38843 (2015/N), OJ C 104 of 18.03.2016, p. 1. 

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Box 1:  Impaired asset measure with State involvement for going-concern banks – 

securitisation of NPLs supported by the "GACS" guarantee scheme (Italy)128 

The  Italian  "GACS"  guarantee  scheme  illustrates  how  impaired  asset  relief  measures 
involving State resources can be constructed in an aid-free manner, thereby not triggering the 
conditionality provided for under the EU's State aid and bank resolution rules. 

Background  

In February 2016, the Italian authorities created a guarantee scheme ("GACS") with an initial 
duration of 18 months to support the securitisation129 and disposal of non-performing loans 
(NPLs)  by  Italian  banks.  The  scheme  was  subsequently  prolonged130  in  August  2017  for 
another 12 months. 

Key features of the impaired asset measure 
The main characteristics of the GACS scheme are shown in Figure A.1. 

Figure A.1 – Functioning of the "GACS" guarantee scheme  

Source: Commission Services (DG COMP) 

The scheme allows the Italian State to give a State guarantee on the senior funding tranche of 
a special-purpose vehicle (SPV) to which a bank transfers (part of) its NPLs at a price not 
exceeding the loans' net book value (NBV). The range of NPLs that can be securitised can be 
wide: in one case, it included secured loans (with a variety of collateral types) and unsecured 
loans  related  to  corporate,  SME  or  individual  borrowers.  For  the  State  guarantee  to  be 
granted,  some  conditions  need  to  be  fulfilled:  (i)  an  ECB-approved  credit  rating  agency131 
must  confirm  the  investment-grade  risk  profile  of  the  SPV's  senior  notes (i.e. rating  before 

128 See Commission decision of 10.02.2016 in case SA.43390 (2016/N), OJ C 161 of 04.05.2016, p. 1. 
129 For further securitisation-related concepts, see Fell, et. Al (2017), Resolving non-performing loans: a role for 

securitisation and other financial structures?, ECB Financial Stability Review May 2017 

130 See Commission decision of 06.09.2017 in case SA.48416 (2017/N), OJ C 40 of 02.02.2018, p. 1. 
131 The GACS decision specifies that the rating and the calibration is performed by an External Credit Assessment 

Institution (ECAI) approved by the ECB as of 1 January 2016 (the "rating agency").  

79 

 
 
 
                                                            
taking  into  account  the  granting  of  the  State  guarantee);  and  (ii)  at  least  half  of  the  SPV's 
more  risky  junior  and  mezzanine  notes  must  be  sold  to  private  investors.  These  conditions 
ensure that the risk that the State runs remains limited and that the securitisation operation is 
confirmed by the market before the guarantee is granted. The guarantee fee to be paid to the 
State  is  based  on  a  market  benchmark.  This  ensures  that  no  advantage  is  conferred  to 
participating banks and their securitisation vehicles, so that no State aid is involved. 

BRRD and State aid considerations 

As the use of the scheme does not entail extraordinary public support as it is State-aid free, 
the scheme does fall neither under the BRRD nor under State aid compatibility requirements. 

Box 2 : NPL hive-off from a going concern bank to a bank-specific AMC: 

HSH Nordbank (Germany)132 

This  case  illustrates  how  impaired  assets  in  the  context  of  a  distressed  bank  that  remains 
going-concern can be hived off to a single ad-hoc AMC. The good parts of the bank continue 
to carry on their activities. 
Background  
In May 2016, with a view to prepare the sale or wind-down of HSH-Nordbank, the German 
authorities decided to transfer up to EUR 6.2 billion of assets to a vehicle owned by the Land 
Schleswig-Holstein and the City of Hamburg (HSH Finanzfonds AöR) at market prices. This 
allowed  the  bank  to  continue  carrying  out  its  banking  activities  pending  its  sale  or  wind-
down. 
Key features of the impaired asset measure 
Asset perimeter: The transferred NPLs were all impaired shipping loans. 
Aid amount: The impaired assets were transferred at market prices to so that the measure was 
aid-free.  
BRRD and State-aid considerations 
Since  the  transfer  of  the  NPLs  was  made  on  market  terms  it  was  considered  as  aid-free. 
Therefore,  it  does  not  entail  extraordinary  public  support  and  does  fall  neither  under  the 
BRRD nor under State aid compatibility requirements. 
Figure A.2.:  Transfer of impaired shipping loans from HSH to an ad hoc AMC  

Source: Commission services (DG COMP) 

132 See Commission decision of 02.05.2016 in case SA.44910 (2016-N), OJ L 319 of 25.11.2016, p. 13. 

80