Bad banks and the urban political economy of financialization

Abstract

This paper seeks to understand the urban dimensions of the resolution of financial crises. It does so by focusing on Asset Management Companies (AMCs), or ‘bad banks’, which are established by governments to acquire and manage toxic assets, often linked to real estate, in the wake of systemic banking crises. Despite the fact that AMCs are a significant financial institution with clear urban implications, they have received surprisingly little attention. Indeed, despite the widespread recognition that financialized real estate markets are inherently crisis prone, there is an absence of literature on the resolution of such crises. The paper argues that AMCs have three distinctly urban dimensions. Firstly, they continue and enhance the extraction of value from urban space. Secondly, they act as ‘market makers’ by restoring the ‘liquidity’ of financialized real estate. Thirdly, they contribute to the globalization of real estate by intensifying the circuits linking local real estate with global pools of capital. Drawing on this analysis, the paper also theorizes AMCs as what have been called ‘apparatuses of financial accumulation’ which, significantly, reveal the systematic inter-dependence of financialization and urban space.

Key words:

• financialization
• bad banks
• Asset Management Companies
• financial crisis
• distressed assets
• urban political economy

Acknowledgements

The author would like to thank Desiree Fields for comments on an earlier draft of this paper.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 REITs are shareholder-based property companies subject to tax advantages. Legislation enabling REITs has been introduced in both Ireland and Spain in the wake of the financial crisis (Beswick et al. 2016).

2 AMCs can, however, take a variety of forms. The most important distinction for the present purposes is between what the economics literature sometimes refers to as ‘centralized’ and ‘decentralized’ models (Klingebiel 2000). Decentralized models target a specific bank, usually via an ‘in-house’ operation to which distressed assets are transferred. The assets remain under the control of the bank, but are separated out from the viable aspects of its business. Examples here include RBS Capital Resolution Group in the UK, which operates under the government-supported RBS. However, the focus of the present paper will be on ‘centralized’ AMCs. These are public bodies which are typically established by specific legislation and acquire assets from across the banking sector in response to systemic crises.

3 NAMA’s portfolio can be broken down as follows: office (16%); development (23%); land (11%); retail (20%); hotel and leisure (9%); industrial (3%); residential (12%); other (5%) (Department of Finance 2014). A total of 80% of SAREB’s assets are financial (i.e. loans) and the remainder are direct real estate assets. The type of direct real estate assets breaks down as follows: 56% residential; 26% ancillary properties; 11% land; 5% commercial property (retail, industrial, offices and hotels). The breakdown for financial assets by underlying security is as follows: 41% residential; 28% land; 10% retail, office, industrial; 10% other guarantees; 11% without guarantees (SAREB 2014).

4 The RTC was subject to significant political debate during the legislative process which led to its establishment, and this led to the inclusion of some objectives around the provision of affordable housing being included in its remit (Davison 2008).

Additional information

Funding

This work was supported by a Government of Ireland Irish Research Council postdoctoral fellowship.

Notes on contributors

Michael Byrne

Michael Byrne is a postdoctoral researcher at the School of Social Policy, Social Work and Social Justice, University College Dublin.