9.8.1 Burden-sharing through a write-down/first-loss tranche

As regards burden sharing, the IAC states in section 5.2 the general principle that banks ought to bear the losses associated with impaired assets to the maximum extent.1 That implies first2 that the bank should bear the difference between the nominal value and the real economic value of the impaired assets.3 It should be recalled that the difference between the nominal value and the real economic value corresponds to the expected losses on the impaired assets. The principle of burden-sharing requires that these losses are not borne by the State, but by the bank. This is achieved by a write-down of the impaired assets from their nominal value to the real economic value. In case of an asset guarantee, burden-sharing can be achieved by retaining a first loss commensurate to such write-down.4 In some of its decisions, the Commission clarified that the first-loss tranche should be sufficiently large to cover all expected losses of the portfolio.5 Point 24 of the IAC stipulates that the first-loss tranche should normally be at least 10% of the shielded portfolio.6