# I. **Introduction**

In recent decades, many countries have experienced banking problems requiring a major and expensive overhaul of their banking system. By one count, 112 episodes of systemic banking crises occurred in 93 countries since the late 1970s (Caprio, Klingebiel 1999). Bank restructuring often has to be accompanied by corporate debt restructuring as most of the NPLs of a banking system in trouble are usually loans to non-financial enterprises which are no longer able to service their debt. Countries can adopt either flow or stock approaches to resolving banking distress and the overhang of bad debt in the financial system.

As cross country evidence indicates, stock solutions tend to be necessary, where banking distress is systemic and often include the liquidation of unviable banks, disposal and management of impaired assets and the restructuring of viable banks. For the management and disposal of bad debt, governments have made extensive use of publicly owned asset management companies (AMCs) that either dispose of assets hived off from bank balance sheets or restructure corporate debt. AMCs have become very popular including in the recent East Asian financial crises (see Claessens, Djankov and Klingebiel, 1999). While establishing AMCs is now an often recommended resolution strategy to manage and dispose of impaired assets (for example Dziobeck, Pazarbasioglu 1997), little is known about the effectiveness of these centralized agencies. The paper below attempts to close this gap and has two objectives: (i) to analyze on a conceptual basis the advantages and disadvantages of AMCs in managing and disposing of impaired assets; and (ii) to gauge the effectiveness of such institutions using cross country experience. It will only focus on this aspect of systemic bank restructuring and will not discuss pros and cons of different bank recapitalization strategies including the use of AMCs as part of that strategy.

Two main types of AMCs can be distinguished: AMCs set up to help and expedite corporate restructuring and AMCs established to dispose of assets acquired/transferred to the government during the crisis-rapid asset disposition vehicles. According to a survey of 26 banking crises (Caprio, Klingebiel 1997b), centralized AMC structures were set up in nine cases. Out of the nine, seven cases, where data was publicly available for a more thorough analysis, were selected. In three out of the seven cases (Finland, Ghana, Sweden), the government set up restructuring vehicles. In four cases (Mexico, the Philippines, Spain and the US) governments set up rapid asset disposition agencies.

The results of the analysis of the seven cases can be summarized as follows: Two out of three corporate restructuring AMCs did not achieve their narrow goals of expediting corporate restructuring. These experiences suggest that AMCs are rarely good tools to accelerate corporate restructuring. Only the Swedish AMC successfully managed its portfolio, acting in some instances as lead agent in the restructuring process. It was helped by some special circumstances, however: the assets acquired were mostly real estate related, not manufacturing that are harder to restructure, and were a small fraction of the banking system which made it easier for the AMC to maintain its independence from political pressures and to sell assets back to the private sector. Rapid asset disposition vehicles fared somewhat better with two out of four agencies, namely Spain and the US, achieving their objectives. The successful experiences suggest that AMCs can be effectively used, but only for the purpose of asset disposition including resolving insolvent and unviable financial institutions. But even achieving these objectives required many ingredients: a type of asset that is easily liquifiable-real estate, 2