9.6 Management of the assets

The ‘management-criterion’ relates to the management of assets. In that regard, section 5.6 of the IAC1 requires a clear functional and organisational separation between the beneficiary bank and its impaired assets in order to prevent conflicts of interest and facilitate the beneficiary bank’s focus on the restoration of viability.2 How this IAC-criterion is interpreted in the decisional practice, depends on the type of asset relief measure.

In case of an asset purchase, the impaired assets are hived off the bank’s balance sheet. As a result, the ‘management-criterion’ is clearly met. For instance, several Spanish banks transferred impaired assets to an Asset Management Company (AMC). Since the AMC is fully independent from the banks, the Commission concluded that the separate asset management was in line with the requirements of the IAC.3

Also in case of a split-up of the bank, the ‘management-criterion’ is clearly met. For instance, in the case of Dunfermline (in which the good parts were sold to Nationwide, while the remaining parts were wound-down in Rump Dunfermline), the Commission noted that the impaired assets remaining in the Rump Dunfermline were managed exclusively by the Rump Dunfermline and its administrators. The Rump Dunfermline was separate and organisationally independent from the transferred entity. The Commission therefore concluded that the requirements of section 5.6 of the IAC were met.4 To conclude, in case of a split-up of the bank, the impaired assets (remaining in the bad bank) are functionally and organisationally separated from the good bank.

A defining feature of the asset guarantee is that the impaired assets remain on the bank’s balance sheet. In such a case, how can a ‘clear functional and organisational separation between the beneficiary bank and its impaired assets’ be achieved?

In the case of HSH Nordbank, the shielded assets remained on the bank’s balance sheet under direct management and supervision of the bank. The Commission had therefore doubts about the compatibility of the measure in relation to the management of the assets.5 In the final decision, the Commission noted favourably that HSH Nordbank had set up a restructuring unit; this was an internal winding-down bank with separate management.6

Also in the case of BayernLB, a restructuring unit was set up (which was functionally and organisationally separated from the bank’s other units).7 The Commission therefore considered that Germany had put in place adequate safeguards to prevent conflicts of interest and to ensure that losses on the covered assets were reduced to the minimum.8

Similarly, in the decision on RBS, the Commission noted that adequate safeguards were put in place to prevent conflicts of interest.9 In addition, the Commission considered the 10% vertical slice of losses in excess of the first-loss as a positive element, because this gave RBS an incentive to maximise recoveries on defaulted assets and hence minimising losses.10

To sum up, even though the impaired assets remained on the bank’s balance sheet, the Commission always concluded that the ‘management-criterion’ was met, when adequate safeguards were in place to prevent conflicts of interest.