Saturday, January 31, 2009

ECB Drawing Up ‘Bad Bank’ Guidelines

DAVOS, Switzerland — The European Central Bank is drawing up guidelines for European governments that are considering so-called “bad banks” to house banks’ toxic assets. The ECB is also working on guidelines for European governments that plan to guarantee toxic assets remaining on banks’ books, another form of bank bailout.

Both sets of guidelines are being drawn up with the European Commission. The ECB hopes the guidelines can help avoid competitive one-upmanship across the 27-nation European Union as nations seek to shore up struggling banks.

The ECB, which makes monetary policy for the 16 countries that share the euro currency, has no power to enforce any guidelines it develops. But in recent months, euro-zone governments have asked the bank to play a mediating role by developing guidelines for, for instance, European government guarantees of some types of bank debt.

Governments across Europe are mulling or enacting new plans to help banks deal with souring loans and other assets that remain on their balance sheets. Many European governments have been slow to consider a “bad bank” option, in which governments could sponsor vehicles into which banks could transfer assets that are hard to sell.

German Finance Minister Peer Steinbrueck told a German daily newspaper Thursday the government would not set up a centralized bad bank, but indicated the government is considering the idea that banks could set up their own individual entities to house toxic assets.

Such banks, Mr. Steinbrueck told the daily Berliner Zeitung, could then use part of the German government’s EUR 500 billion banking-sector rescue plan to shore up their remaining sound business.

The ECB is also working on guidelines for governments that hope to offer insurance against the toxic assets that remain on banks’ books. One key question: how to price the toxic assets.

Wall Street Journal

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