Fed’s Rosengren: Get Bad Assets off Bank Books

Gaining insight from the banking crisis in Japan a decade ago, the United States should immediately remove troubled assets off bank balance sheets, the president of the Federal Reserve Bank of Boston said Monday. “Banks with troubled assets focus on avoiding further losses and further depleting capital,” Boston Fed chief Eric Rosengren told a conference of international bankers. “Troubled banks in Japan were often more supportive of problem borrowers than borrowers who had good prospects going forward.  Focusing on future growth requires removing the problem assets.” Furthermore, governments are not the best managers of bad assets, Rosengren said. Japan’s financial hardship in the 1990s — often referred to as the “lost decade” in which the government’s hesitation to deal with troubled banks lead to “zombie banks” — has been a subject of focus for U.S. policy makers as they search for a solution to the nation’s credit freeze, according to a Market Watch report. When a bank is closed with FDIC support — the current protocol for troubled banks in the United States — the institution’s bad assets are removed and quickly disposed of by the FDIC, and the good assets are sold to an acquirer.  The new acquirer does not spend time focusing on the problems of the past, but rather, focuses on maximizing future profitability — which is a good thing, according to Rosengren. But the problems become more difficult when bad assets are present in troubled, but not insolvent, banks the Fed president said. And allowing these banks to struggle in hopes of a recovery isn’t a good idea. Troubled banks tend to postpone reserving loans because it would further deplete capital. “The evidence from Japan and previous problems in the U.S. indicates that allowing poorly capitalized banks to continue operations with insufficient capital is likely to exacerbate problems with credit availability,” Rosengren said. And therefore, the government should move “quickly” to resolve banks that are “clearly insolvent.” While Rosengren didn’t offer an outright solution to the issues he raised, he said the issues themselves “must remain in our sights.” Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.