Bad bank
Encyclopedia
Bad bank is a term for a financial institution
created to hold nonperforming assets owned by a state
guaranteed bank. Such institutions have been created to address challenges arising during an economic credit crunch
wherein private banks are allowed to take problem assets off their books. Securum
, a Swedish bank founded to take on bad assets during the Swedish banking rescue
of 1991 and 1992, is an example of such a bank.
The financial crisis of 2007–2010 resulted in bad banks being set up to handle the crisis in a variety of countries. For example, a bad bank was suggested as part of the Emergency Economic Stabilization Act of 2008
to help address the subprime mortgage crisis
in the US. In Ireland
, a bad bank, the National Asset Management Agency
was established in 2009, in response to the financial crisis in that country
.
. Retriva took over all the nonperforming loans from Gotabank and Securum took over the non-performing loans from Nordbanken. Some major conclusions from the experiences in Sweden:
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
created to hold nonperforming assets owned by a state
State (polity)
A state is an organized political community, living under a government. States may be sovereign and may enjoy a monopoly on the legal initiation of force and are not dependent on, or subject to any other power or state. Many states are federated states which participate in a federal union...
guaranteed bank. Such institutions have been created to address challenges arising during an economic credit crunch
Credit crunch
A credit crunch is a reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates...
wherein private banks are allowed to take problem assets off their books. Securum
Securum
Securum was a Swedish state company founded in 1992 during the financial crisis in Sweden 1990–1994 for the purpose of taking on and unwinding bad debts from the partly state-owned Nordbanken bank...
, a Swedish bank founded to take on bad assets during the Swedish banking rescue
Swedish banking rescue
During 1991 and 1992, a housing bubble in Sweden deflated, resulting in a severe credit crunch and widespread bank insolvency. The causes were similar to those of the subprime mortgage crisis of 2007-2008...
of 1991 and 1992, is an example of such a bank.
The financial crisis of 2007–2010 resulted in bad banks being set up to handle the crisis in a variety of countries. For example, a bad bank was suggested as part of the Emergency Economic Stabilization Act of 2008
Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 (Division A of , commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis...
to help address the subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
in the US. In Ireland
Republic of Ireland
Ireland , described as the Republic of Ireland , is a sovereign state in Europe occupying approximately five-sixths of the island of the same name. Its capital is Dublin. Ireland, which had a population of 4.58 million in 2011, is a constitutional republic governed as a parliamentary democracy,...
, a bad bank, the National Asset Management Agency
National Asset Management Agency
The National Asset Management Agency is a body created by the Government of Ireland in late 2009. It is in response to the Irish financial crisis and the deflation of the Irish property bubble....
was established in 2009, in response to the financial crisis in that country
2008–2009 Irish financial crisis
The 2008–2011 Irish financial crisis, which had stemmed from the financial crisis of 2008, is a major political and economic crisis in Ireland that is partly responsible for the country falling into recession for the first time since the 1980s...
.
Experiences from Swedish bad banking
Sweden went through a major banking crisis in the 1990s. Three out of the four major banks were insolvent. The Swedish government chose to establish two bad banks, Retriva and SecurumSecurum
Securum was a Swedish state company founded in 1992 during the financial crisis in Sweden 1990–1994 for the purpose of taking on and unwinding bad debts from the partly state-owned Nordbanken bank...
. Retriva took over all the nonperforming loans from Gotabank and Securum took over the non-performing loans from Nordbanken. Some major conclusions from the experiences in Sweden:
- By separating the non-performing loans from the banks, it was possible to start the process of focusing the banks back to lending. Trying to work out all the non-performing loans inside the bank only prolonged the healing process in the organisation and reduced the ability of the bank to lend more to the public and businesses.
- Repairing the balance sheet of the banks is only one important element to get the banks back to normal lending activities. The other major element is organisational processes.
- The organisational requirements are very different in a bad bank than in a normal bank. A good bank is a 'process' organisation while a bad bank is a 'project' organisation. The skill set and the emphasis on type of skills are different in a restructuring and winding up situation than in a lending situation.
- The first year of the bad bank determines its success. The challenge is the large number of non-performing loans in a wide variety of situations with regards to geographical location, type of industry, size and type of problem. If the bad bank does not quickly get control of the loans, a lot of value is lost and the capital requirements of the bad bank can change dramatically. To be successful, a well-defined process on how to handle the different loans has to be established. This process has to be followed and managed with force and speed in the organisation. If not, the bad bank will easily end up in chaos.
- When a bad bank has gone through its credit work-out process, the remains of the bad bank is often asset ownership. Therefore the bad bank in its life span changes dramatically from being at the outset basically a bank with a large number of loans to later in life a large asset-owning company. A common mistake is to think of this last phase of the bad bank as a kind of investment company. An investment company has very well defined objectives regarding what type of assets they want to acquire. They choose the assets they want to acquire. A bad bank gets all the assets that are left after the credit work-out process.
- A lifetime of 10–15 years is too long for planning purposes. The world changes substantially in such a long life span. Most banking crises are over in a 5–6 year period. A 5–6 year time span is the logical time to use for planning purposes and the time line to use for winding down a bad bank.