Today I want to explain to you what we understand as a Bad Bank.
Bad bank is an institution created by the state in order to keep or hold the toxics assets of the banks of the country. This banks are created when the flow of the money is broken, companies and people can't access to the credit, and that is because the banks have liquidity problems. This institution helps banks to clear from their balance sheets their toxics assets. Normally Bad banks can negociate the prices of those assets, the price established is normally ranged between the market price and the price at the balance sheets of the banks.
There are some variants of a Bad Bank:
- The good bad bank forces banks to write off those assets and clean up their balance sheets. Those that are insolvent are recapitalized, nationalized or liquidated
- Bad bad bank buys toxic assets at inflated prices and thus the financial system can start lending money again.
David Roche writes in the WSJ
"Desperate to preserve the value of asset prices inflated by this huge liquidity bubble, policy makers have avoided the painful solution. The liquidity injections, the bailout programs, and the fiscal-stimulus packages try to sustain asset prices, when these prices need to fall to market levels so they can be cleared. The policy makers have just prolonged the crisis.
As we saw in Japan in the 1990s, if the market is not allowed to clear, the financial crisis will be prolonged. Although debt deflation may be avoided, the economic recession will be longer and the recovery weaker.
By not adopting the good bad-bank solution, the system remains as corrupted as before. The bad assets will continue to suck resources out of the economic system in the form of zombie borrowers, misallocation and mispricing of capital, public sector debt, and budget deficits."
Here you will find the whole article: David Roche at The Wall Street Journal