9.7.1 Market value, transfer value and ‘real economic value’

An important issue is the valuation of impaired assets. Before discussing the valuation-criterion of the IAC, it is useful to clarify the various concepts of value. A distinction can be made between the i) nominal value, ii) market value, iii) real economic value (REV), and iv) transfer value.

The market value is what the market is willing to pay for the assets. Normally, the market value should reflect the intrinsic value of financial assets. However, the market value of impaired assets does not reflect their intrinsic value. The IAC therefore introduces the concept of real economic value. The real economic value corresponds to the net present value of the underlying cash flows, and should reflect the underlying long-term economic value of the assets.1 The ex ante expected losses on the impaired assets are taken into account in the calculation of the real economic value.

Another value concept is the transfer value. The transfer value is the price that the State-sponsored special purpose vehicle (SPV) pays for the assets. In case of an asset purchase, the impaired assets are really transferred to the State-sponsored SPV. But what is the ‘transfer value’ in case of an asset guarantee? In such a case, the ‘transfer value’ corresponds to total nominal value of the shielded assets minus the first-loss tranche.2 In other words: the transfer value is understood as the insured amount.3

The difference between the transfer value and the market value is the amount of aid that is incorporated by the asset relief measure. The aid amount thus corresponds to the difference between the transfer value of the assets and the market value. It should be pointed out that in case of an asset guarantee, the aid amount results from the difference between the transfer value and the market value of the shielded assets, capped at the notional amount of the guarantee.4

The different concepts of value can be clarified by means of an example. Assume that the nominal value of the portfolio of impaired assets is EUR 100, whereas the market value is only EUR 50. Assume that the REV is EUR 80 and that the portfolio is transferred at a price of EUR 80 (i.e. the transfer value is EUR 80). The aid amount incorporated in the asset transfer is 30 (i.e. the difference between the transfer value of 80 and the market value of 50). The bank has to write-down the portfolio from 100 to 80, so the own contribution of the bank is 20. This own contribution is known as ‘burden-sharing’ and will be discussed in depth in section 9.8.