recently, some countries, such as Vietnam (in 2013), Angola (in 2016), and India (in 2021),74 set up public AMCs to help address NPL problems.75 Public AMCs offer important benefits to banks and regulators seeking to resolve high NPL levels.76 Besides removing problem loans from bank balance sheets, public AMCs give regulators additional leverage to force banks to recognize credit losses—an important step toward restoring public confidence in the banking sector and a critical one in countries where the integrity of reported indicators of asset quality is little trusted. Meanwhile, because of their size and specialization in certain kinds of loans and in recognizing the value of and selling these types of distressed assets, public AMCs can provide economies of scale in the management of distressed assets and greater cost efficiency. This is particularly true if public AMCs can focus on a set of large, complex loans, such as those for real estate development. In addition, by gathering a large volume of homogeneous, distressed assets, public AMCs can help to overcome complex, multicreditor collective action problems and package the assets for sale to outside specialist investors. Public AMCs benefit from enhanced bargaining power with both buyers and sellers, and from having time to realize the value of these assets, thereby avoiding the unnecessary losses associated with fire sales. Setting up a public AMC requires the availability of fiscal resources because finance ministries typically provide (part of) the initial capital and often a partial guarantee on the bonds that banks receive in exchange for the transferred assets. Achieving these benefits requires a well-designed public AMC, and this is an area in which emerging economies have experienced serious challenges. Without an appropriate design, public AMCs can be vulnerable to political interference in the form of pressure to support well-connected borrowers, strategic sectors, or state-owned enterprises; pressure to include political appointees rather than seasoned workout experts; and rules that allow the public AMC to buy distressed assets at a premium over market prices, which gives banks a subsidy and discourages them from adhering to strong underwriting practices when they originate loans. The outcome could be a buildup of significant contingent liabilities for taxpayers. Emerging economies have also struggled to make public AMCs time-bound. Sunset clauses help to encourage banks to quickly transfer bad loans to a public AMC and incentivize public AMCs to work out these assets within a reasonable time frame, mitigating the risk that they become warehouses for bad assets. In summary, although a public AMC is an option for NPL resolution, it is not a silver bullet. Public AMCs are most effective when they focus on a relatively homogeneous pool of large corporate loans; include a sunset clause; embrace robust governance, transparency, and disclosure arrangements; and are embedded in a comprehensive NPL resolution strategy, as advocated throughout this chapter.
Dealing with problem banks Despite the best efforts of banks and governments to prepare for rising NPLs, some banks—especially if they were weak or failing before the pandemic—may be unable to absorb the additional pressure. Dealing expeditiously with these banks is essential to support a strong, sustainable recovery. A powerful lesson from previous episodes of severe banking stress is that delay is costly for two interrelated reasons. First, delay typically increases the scale of the problem.77 Weak banks generally become weaker absent remedial action: they face both higher funding costs and the risk of losing higher-quality clients and depositors due to a loss in confidence. In the worst case, the result will be bank runs and failure, contagion across the system, and financial crisis. Second, weak banks tend to both misallocate and restrict the supply of credit, which hold back the recovery and dampen future growth.78 Preserving financial system health by quickly addressing any bank distress that arises is critical to ensure the efficient and prompt
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