2 required because the task, of dealing with non-performing loans is fundamentally different from that of making loans. Transferring assets to a centralized asset management company may also increase leverage over debtors and break perverse ownership links between banks and corporations allowing for better collections on loans. Notwithstanding these advantages, recent country experience shows that it is difficult to insulate an asset management company holding a large share of corporate claims against political pressures. Moreover, a transfer of the loans breaks the links between banks and corporations-relationships made valuable by banks' access to corporate information. And if an asset management company fails to actively manage the assets it holds, it can undermine credit discipline in the entire system. The evidence on how successful AMCs have been is mixed (Klingebiel 2000).

Box 1: The Use of Asset Management Companies in the Resolution of Banking Crises - **Cross Country Experience**

**In** the past, asset management companies (AMCs) have been employed to address the overhang of bad debt in the financial system. Two main types of AMCs can be distinguished: AMCs set up to help and expedite corporate restructuring and AMCs established as rapid asset disposition vehicles. A review of seven cases reveals that AMCs have a mixed record. In two out of three cases, corporate restructuring AMCs did not achieve their narrow goals of expediting bank and/or corporate restructuring. These experiences suggest that AMCs are rarely good tools to expedite 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 narrowly defined purposes of resolving insolvent and unviable financial institutions and selling of their assets. But even achieving these objectiyes required many ingredients: a type of asset that is easily liquifiable (real estate), mostly professional management, political independence, a skilled resource base, appropriate funding, adequate bankruptcy and foreclosure laws, good information and management systems, and transparency in operations and processes. In the Philippines and Mexico, the success of the AMCs was doomed from the start as the governments transferred politically motivated loans and/or fraudulent assets to the<sup>AMCs</sup> which are difficult to be resolved or to be sold off by a govermnent agency susceptible to political pressure and lacking independence. Both of these agencies did not succeed in achieving their narrow objectives.

Source: Klingebiel, 2000.

The _decentralized, creditor-led work-out._ approach relies on banks and other creditors to resolve non-performing loans. Since banks have the institutional knowledge of the borrower, and since their own survival depends on asset recovery, they may be better able and willing to maximize recovery value and avoid future losses. Furthermore, banks can provide new loans in debt restructuring.