Bad Bank

Financial Times  Aug 28  Comment 
The announcement from Huarong comes as shares in its bad bank cousin Cinda suffer their worst one-day fall due to disappointing profit expectations
Financial Times  Aug 7  Comment 
Net income more than doubles to €100m as it cuts risk at its non-core unit, with loss provisions there around a fifth of the same period a year earlier
Financial Times  Jul 29  Comment 
Further reforms are needed as banks are capable of supplying less than half the $270bn estimated as necessary to support a more robust rate of growth
Financial Times  Jul 8  Comment 
Establishing what this means for the valuation of banks is tricky, not least because the cheerful share price response to the BNP Paribas fine poses a question for US regulators
Reuters  Jun 11  Comment 
Spain's banks are creating a form of "bad bank" to pool their stakes in struggling companies, bankers and financial advisers said, in a scheme aimed at reviving firms hit...
Times Online  Jun 3  Comment 
The state-run “bad bank” in charge of running down Northern Rock and Bradford & Bingley’s loans has returned more than...
Financial Times  May 7  Comment 
UK bank said in February it would cut 10,000-12,000 jobs out of its 140,000-strong workforce, but it is now expected to add several thousand more job cuts


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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