Bad Bank

The Economic Times  Jul 2  Comment 
Mehta panel has recommended an asset management company/alternative investment fund-led resolution approach to deal with NPA cases of over Rs 500 crore.
The Hindu Business Line  Jun 28  Comment 
State Bank chairman Rajnish Kumar, who is a member of the panel formed to give recommendations for setting up a state-run bad bank, today said they w
The Economic Times  Jun 28  Comment 
​The idea of a bad bank resurfaced after state-run banks purportedly suggested the creation of an ARC and even wanted to rope in the NIIF toward this end.
The Economic Times  Jun 20  Comment 
Interim FM Piyush Goyal announced the bad bank while replying to questions on how the government plans to deal with rising bad loans.
The Hindu Business Line  Jun 18  Comment 
With reference to the editorial “A bad idea” (June 18), the proceedings under the Insolvency and Bankruptcy Code are unlikely to result in the recover
The Economic Times  Jun 13  Comment 
The interim finance minister, Piyush Goyal, announced the formation of a committee to give recommendations on formation of an ARC for resolving NPAs.
The Economic Times  Jun 12  Comment 
Given just how capital-starved some state-run banks are, having them book steep upfront losses on sales would necessitate immediate consolidation or, even closure.
The Economic Times  Jun 9  Comment 
A bad bank is essentially the government's financial help to banks. Its primary task is to free the debt-laden banks of their burden of resolving bad loans.


A "Bad Bank" is a bank---or some type of financial institution---that the government would establish to buy and hold all of the "bad," or toxic, assets other banks and financial institutions want to sell and get off of their books.

Most of these bad, or toxic, assets are mortgage-backed securities that have been losing value during the past year. Actually, one of the greatest difficulties with mortgage-backed securities during this financial crisis has stemmed from the fact that nobody has been able to come up with an accurate value for these assets.

Ideally, setting up a "Bad Bank" would help solve this problem because the "Bad Bank" would have to come up with a price it was willing to pay for the bad assets---thus setting a value for the assets that everyone could use in their valuations.

It's effect on Bank Stock prices

Ideally, if the government sets up a "Bad Bank" to buy up all of the toxic assets, investors will be more comfortable investing in banks and buying their stock because the risks associated with doing so will have been diminished.

Unfortunately, determining which assets are toxic today and which assets will be toxic in the future is a difficult task, and it will be tough for banks to shed all of their risk associated with mortgage-backed securities, etc. While nobody is expecting perfection here, the remaining risks may be enough to keep bank stock values depressed for some time.

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