Banks Face Daunting Challenge of Moving Distressed Assets From Balance Sheets

As news of the US government’s plan of assistance for Citigroup continues to reverberate, new research from TowerGroup analyzes the larger issues facing the “recapitalization” of the US banking industry.
 
In contrast to governmental actions taken by the United Kingdom and some other European nations to recapitalize troubled banks in their domain by taking equity stakes in the banks, the US government has begun the process of recapitalizing US banks by taking preferential yet nonvoting equity stakes in a handful of financial institutions.  As signed into law on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) has provided unprecedented discretion and levels of funding to the US Treasury Secretary to address the economic crisis.
 
Although originally designed to deal with toxic assets held by banks, EESA recently refocused away from distressed loans to concentrate on directly injecting capital into banks.  Since the signing of EESA, the number and types of distressed and illiquid assets held by banks have grown.  These assets now encompass both collateralized and noncollateralized assets, which include commercial as well as consumer loans.
 
TowerGroup notes that while the US banking industry has been debating the topic of direct equity participation in banks, the core question of how to move distressed assets from the balance sheets of the banks has received scant attention.  Direct infusions of capital into major banks does not address the issue of illiquid, toxic assets.  Banks are finding that both collateralized and noncollateralized consumer and commercial assets are moving toward delinquency and collection status.  TowerGroup believes that the challenge of these problem loans on the books of banks is only going to get larger in the coming months, as more loans – and more types of loans – deteriorate.
 
The TowerGroup report titled “Recapitalizing (but Not Nationalizing) the US Banking Market: It’s the White Space That Matters” is authored by Kathleen Khirallah, managing director and practice leader of the TowerGroup Banking practice.  It examines the actions taken by the US Department of the Treasury and the US Congress to stabilize and recapitalize – but not nationalize – the US banking industry.  To request a copy of the research or to arrange an interview with Khirallah, please contact Jorge Lavina at +1.917.595.3047 or jlavina@cooperkatz.com. Those interested in subscribing to a TowerGroup research service may call +1.781.292.5200 or email service-info@towergroup.com. 
 
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About TowerGroup
TowerGroup is the leading research and advisory services firm focused exclusively on the financial services industry. A respected source for trusted information and advice, TowerGroup brings many of the world’s leading financial institutions, technology companies, and professional services firms a deeper understanding of the business and technology issues impacting their organizations. Headquartered near Boston in Needham, Massachusetts, and with offices in North America and Europe, TowerGroup serves a global client base. Visit http://www.towergroup.com for more information.