AuthorHellwig, Martin F.
Valuation reports in the context of banking resolution: What are the challenges?Valuation reports in
the context of banking resolution: What are the challenges?
PE 624.417 21
The greatest challenge for valuation in resolution and for the resolution procedure itself is to establish
credibility and legitimacy. The main difficulty is that “value” is not something objectively given that one
can easily measure. “Value” refers to a counterfactual, an exchange of an object for money that does
not actually take place. The counterfactual nature of the concept creates no difficulties if equivalent
objects, e.g. assets with the same return patterns, actually are traded in markets. But even then one
must be cautious about the possibility that the expression of a desire to trade may affect market prices,
because markets are illiquid, because of market power, or because potential buyers are afraid of
‘lemons’ effects stemming from information asymmetries.
For assets are not traded in markets, it is unlikely that traded assets are fully equivalent. In particular,
such assets are unlikely to exhibit the same risk characteristics. The treatment of risk in the returns of a
non-traded asset may therefore involve a certain element of arbitrariness. The same is true for the
treatment of illiquidity costs, i.e. the costs that the holder of a non-tradable asset may incur because in
a liquidity crunch the asset cannot be sold, or not be sold withou t a loss.
The assessment of probability distributions of future returns may also involve important elements of
subjective judgment. This is especially true for loans, where randomness is associated with default,
which is a rare event. With lending for the purchase of durable assets like real estate or ships, the
additional problem arises that default probabilities depend on the market situation, more concretely,
on whether the markets for the durable are in a boom phase or a bust phase.
In the application of the BRRD and the SRM Regulatio n, a major problem comes from the fact that the
no-investor-worse-off principle is unclear. On the face of it, the standard of comparison for this principle
is given by the ex post outcome under an insolvency procedure. This standard however is unrealistic
because the ex post outcome under an insolvency procedure often cannot be known. This outcome
depends on the resolution of uncertainty in the insolvency procedure itself. Information about how
uncertainty would be resolved in an insolvency procedure is often unattainable because resolution
itself pre-empts the insolvency procedure. It may therefore be more practical to think about the no-
investor-worse-off principle from an ex ante perspective, at the time when the resolution decision is
taken. At this time, the returns to investors from an insolvency procedure are not known, but one can
form expectations about their probability distributions and assess their values. The value assessment
involves elements of subjective judgment about risk premia, but this may be less problematic than the
biases that arise in a counterfactual ex post assessment when some aspects of the counterfactual
resolution of uncertainty in an insolvency procedure can be assessed and others, perhaps more
important, cannot.
When the sale-of-business tool is applied, there are reasons to believe that the sales price itself provides
a good reference for Valuation 3, at least if the bidding process was sufficiently competitive. If the
bidding process was competitive, the sales price is likely to higher than what would be received in an
insolvency procedure. An assessment of competitiveness of the bidding process should not focus on
the number of bids received but on the openness of the process to potential bidders. The number of
bids received may reflect the potential bidders’ assessments of the business and their own ability to
address the problems that forced the institution into resolution.
The concept of “economic value”, as distinct from market value, is problematic if there is no feasible
strategy attached to it. If markets are depressed, one may consider prices to be abnormally low, so that
holding and managing them is preferred to a sale. That is a legitimate business judgment provided the
strategy of holding and managing them is actually feasible. In this case, however, an assessment of

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