Bad Bank

Financial Times  May 24  Comment 
Disposal of portfolio comprising mainly self-certified buy-to-let mortgages largest of kind in Europe
Wall Street Journal  May 11  Comment 
China Cinda Asset Management’s possible $5 billion preferred share deal tops up capital as swallowing distressed debts gets harder.
Financial Times  Apr 27  Comment 
Bailie is finishing off a huge assets disposal, a job once described as ‘defusing the time-bomb’
Financial Times  Mar 17  Comment 
Nama is under fire on three fronts including charges it enjoys far lower borrowing costs
Financial Times  Mar 9  Comment 
Official tells FT conference recapitalising banks is key to post-sanctions growth
Financial Times  Feb 18  Comment 
Annual budget will seek to reassure investors about banking system
Euromoney  Feb 3  Comment 
Europe’s plan for a bad bank in Italy, it turns out, is to not have a bad bank at all.
The Economic Times  Feb 2  Comment 
RBI Governor Raghuram Rajan today said such a concept generally works when stressed assets are largely with private lenders.
Financial Times  Jan 26  Comment 
Agreement guaranteeing Italy’s non-performing loans designed to make them more appealing to investors


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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