The European Commission has published in the Official Journal of the European Union on March 26th 2009, its Communication on on the treatment of impaired assets in the Community banking sector. In this Communication, the Commission puts forward its recommendations for Member states, highlighting the different envisageable approaches to deal with impaired assets, specially by assets purchase or assets insurances schemes.

Commission's Communication focuses on issues to be addressed by Member States in considering, designing and implementing asset relief measures. At a general level, those issues include the rationale for asset relief as a measure to safeguard financial stability and underpin bank lending, the longer-term considerations of banking-sector viability and budgetary sustainability to be taken into account when considering asset relief measures and the need for a common and coordinated Community approach to asset relief, notably to ensure a level playing field.

In the context of such a Community approach, this Communication also offers more specific guidance on the application of State-aid rules to asset relief, focusing on issues such as:

• Transparency and disclosure requirements.
• Burden sharing between the State, shareholders and creditors.
• Aligning incentives for beneficiaries with public policy objectives.
• Principles for designing asset relief measures in terms of eligibility, valuation and management of impaired assets.
• The relationship between asset relief, other government support measures and the restructuring of banks.

The immediate objectives of the Member State rescue packages announced in October 2008 are to safeguard financial stability and underpin the supply of credit to the real economy. In the Commission's opinion it is too early to draw definitive conclusions on the effectiveness of the packages, but it is clear that they have averted the risk of financial meltdown and have supported the functioning of important inter-bank markets.

However, the evolution in lending to the real economy since the announcement of the packages has been unfavourable, with recent statistics suggesting a sharp deceleration in credit growth. In many Member States, reports of businesses being denied access to bank credit are now widespread and it would seem that the squeeze on credit goes beyond that justified by cyclical considerations.

The Commission will apply this Communication from February 25th 2009, the date on which it agreed in principle its content, having regard to the financial and economic context which required immediate action.