capital market-and that were transferred to the AMC during a bank restructuring and/or recapitalization exercise. To maintain value, assets need to be managed. Even good loans tend to lose value when they are taken from the originating bank unless the AMC monitors them actively.1<sup>0</sup> Otherwise even good borrowers may fail to service their loans. The management of the assets can either be performed by the AMC itself, or can be outsourced to the private sector or by the originating bank if it is still in operation. In that case, a loss sharing arrangement with the AMC could provide incentives for the bank to monitor/manage the assets properly.<sup>1</sup> 1 Liquidation agencies are set up to resolve failed financial institutions including selling of their assets through P&As, insured deposit transfers, as well as deposit payoff and sale of the performing or non-performing assets that cannot be sold in P&A transactions.

_Restructuring agencies._ Restructuring agencies are usually set up on a longer term basis and are aimed at restructuring and liquidating NPLs of non-viable borrowers prior to their sale. Typically, as a first step in the restructuring process, the assets transferred to the AMC are grouped either into viable claims that need to be restructured or into non-viable claims for which borrowers will be forced into bankruptcy.12 The overall objective of the AMC, if it is pursuing a commercial objective, usually is to make the assets financially viable and thus attractive for a buyer. The restructuring of viable assets can include-in case of an industrial company-selling off non-core assets and improving the overall efficiency of operations by reorganizing and reducing staff, cutting other costs, restructuring product lines, etc. In case of commercial real estate and residential homes, measures to increase the attractiveness of the properties can include renovation of the properties to adapt them to current market demand or reducing the vacancy ratio, which is a crucial factor in improving the cash-flow. As restructuring often requires new lending, the AMC needs to have the capacity to lend.'<sup>3</sup> After the restructuring process is completed, assets are sold to investors in various ways.

_Ownership Structure._ Large privately held centralized AMCs are rare. If a substantial amount of bad loans and assets were transferred to an AMC, i: is usually difficult to find private investors willing to assume the ownership of such an AMC without requiring far reaching state guarantees covering the future value of the asset portfolio. In that case, the government may be in a more favorable position if it owns the AMC rather than providing such guarantees since it might then benefit from any upward price movement of AMC assets. Moreover, under such a scenario, it may be difficult to structure the guarantee in such a way that it preserves the private owners' incentives to sell the assets at best prices. Public ownership could also be warranted if the value of impaired assets could be destroyed through "fire sale" liquidations. In that instance, the gradual sale by a specialized public agency may be better able to preserve the asset value.

_The timing of assets sales._ The warehousing of assets in the hopes of obtaining higher prices later may not prevent prices from tumbling since the future supply of assets will be discounted in current prices (Shleifer and Vishny 1992; Lang, Poulsen and Stulz 1995). This is especially

> '0 To fulfill this role, the AMC need to set up internal information and operations systems and procedures and need to track assets and catalogue them.

> " In the Mexican case, the management of the assets was left with the originating banks. Despite loss-sharing agreements aimed at incentivizing the originating bank to continue to manage the assets properly, assets transferred to the AMCs were managed inadequately resulting in a further deteriDration of asset values. This suggests that it may not be an easy undertaking to develop incentive compatible contracts to prevent this from happening.

> **12** To increase transparency and depoliticize the process, these assessments should be done by third parties. **13** For more detail see: Ingves/Lind 1996.

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