Bad bank

Bad bank is a term for a financial institution created to hold nonperforming assets owned by a state guaranteed bank.[1] 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.[2] 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.

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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 Securum. 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:

Bad banking in Finland

Criticism

Critics of bad banks argue that the prospect that the state will take over non-performing loans encourages banks to take undue risks, which they otherwise would not. Another criticism is that the option of handing the loan over to the bad bank becomes essentially a subsidy on corporate bankruptcy. Instead of developing a company that is temporarily unable to pay, the bondholder is given an incentive to sue for bankruptcy immediately, which makes it eligible for sale to a bad bank. Thus, it can become a subsidy for banks on the expense of small businesses.

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