Having had a lot of experience with bad banks and Bad Banking in Norway in the eighties, I feel a short reference is best placed as follows :
A band bank broadly speaking is a bank set up to buy the bad loans away or out of a bank with significant nonperforming assets at near market price. In transferring the bad assets of an institution (bank) to the bad bank, the banks thus clear their balance sheet of toxic assets, but do however take write downs. It is possible that shareholders and bondholders are left exposed and can stand to lose money from this solution . This solution does though protect the depositors (although not always fully).Ultimately Banks that become insolvent as a result of the process can be recapitalized, nationalized or liquidated.
An example of a bad bank was Grant Street National Bank, which was created in 1988 to house the bad assets of Mellon Bank. The financial crisis of 2008/9 to present has somewhat revived interest in the bad bank solution, as managers at some of the world's largest institutions contemplated segregating their nonperforming assets into bad banks. Bad banking is now considered in most cases where a primary tier 1 bank carries major toxic or non- performing assets. “Federal Reserve Bank Chairman Ben Bernanke proposed the idea of using a government-run bad bank in the recession following the subprime mortgage meltdown in order to clean up private banks with high levels of problematic assets and allows them to start lending again. An alternate strategy considered was a guaranteed insurance plan that would keep the toxic assets on the banks' books but eliminate the banks' risk and pass the risk on to taxpayers.”
By: Aksel Bratvedt Senior Bad Bank Consultant
A band bank broadly speaking is a bank set up to buy the bad loans away or out of a bank with significant nonperforming assets at near market price. In transferring the bad assets of an institution (bank) to the bad bank, the banks thus clear their balance sheet of toxic assets, but do however take write downs. It is possible that shareholders and bondholders are left exposed and can stand to lose money from this solution . This solution does though protect the depositors (although not always fully).Ultimately Banks that become insolvent as a result of the process can be recapitalized, nationalized or liquidated.
An example of a bad bank was Grant Street National Bank, which was created in 1988 to house the bad assets of Mellon Bank. The financial crisis of 2008/9 to present has somewhat revived interest in the bad bank solution, as managers at some of the world's largest institutions contemplated segregating their nonperforming assets into bad banks. Bad banking is now considered in most cases where a primary tier 1 bank carries major toxic or non- performing assets. “Federal Reserve Bank Chairman Ben Bernanke proposed the idea of using a government-run bad bank in the recession following the subprime mortgage meltdown in order to clean up private banks with high levels of problematic assets and allows them to start lending again. An alternate strategy considered was a guaranteed insurance plan that would keep the toxic assets on the banks' books but eliminate the banks' risk and pass the risk on to taxpayers.”
By: Aksel Bratvedt Senior Bad Bank Consultant
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