Distressed assets and fiscal-monetary support: are AMCs a third way?

Following the Global Financial Crisis of 2007-8, Ireland, Slovenia, and Spain set up public Asset Management Companies (AMCs), purchasing delinquent loans equal to 44%, 16%, and 10% of GDP, respectively. Though deemed successful, it’s unclear if this was de facto traditional capital and liquidity support. We show that AMCs have a systematic advantage in reducing pecuniary externalities and costs associated with loan delinquencies. AMCs enhance average returns to bank lending, promoting additional lending (bank lending channel) and improving corporate borrowers’ balance sheets (balance sheet channel). The welfare gains of well-designed and well-managed AMCs are between 0.2% and 0.5% of steady-state consumption, independent of whether they are financed through fiscal transfers or sterilized monetary transfers; AMCs can complement traditional fiscal and monetary policies in managing financial crises.