To assure the proper functioning of these banks it is imperative that proper

To assure the proper functioning of these banks it is

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Governments should not direct the lending activities of these banks. To assure the proper functioning of these banks it is imperative that proper governance structures be put in place. The banks should have boards of directors who are responsible for managing the bank so as to maximize profits and shareholder value. Ideally, the government should sell off a small portion of its shares to private shareholders and these owners would bring in business people to the board of directors. Such a sale can be done through a public offering or similar approach. By only selling a small amount the government still retains the ability to subsequently deliver a controlling interest in the bank to a private investor, or failing to find one selling the shares to the public in a series of offerings over a period of time. The management of impaired assets, including nonperforming loans, is one of the most complex parts of financial restructuring. Troubled assets can either be handled by financial institutions themselves (for those institutions that are recapitalized), by bank- specific or centralized asset management companies, or they can be put through traditional liquidation processes. 6 The assets should be managed or disposed of in such a way as to maximize their net present value while at the same time maintaining creditor discipline in the system. The types of impaired assets and the availability of asset management talent should to a large extent, determine the choice of asset management structure and strategies. Indonesia, Korea, and Malaysia opted for centralized asset management structures, while Thailand has a centralized structure for residual assets and encouraged the development of bank-specific companies in response to the crisis, however, it has recently also established a centralized AMC. One of the major considerations in devising asset management strategies is 5 See Chopra, et. al. (2001, p. 48) 6 See Ingves (2000) for a more detailed discussion of the role of asset management companies in bank restructuring.
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- 8 - the issue of debt restructuring. If a significant portion of the nonperforming loans involve corporate debt, and the underlying problems result from excessive leverage, it has been shown to be beneficial to restructure the debt in a manner that allows the corporate entity to continue to function in a profitable manner. At the same time the government should receive its fair share of the upside through equity participations. Where industrial and commercial firms are economically viable businesses, shutting them down or forcing them through a liquidation procedure may exacerbate weakened economic conditions. Once the banking system has been restructured and regained its health the blanket guarantee is revoked . This should be a nonevent if the financial sector has truly returned to health and appropriate prudential standards have been put in place along with meaningful enforcement. At this stage in the process, the infrastructure of bank regulation should have been developed so that, in the event of future problems, exit strategies are in
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