Bad Bank

A bank set up to buy the bad loans of a bank with significant nonperforming assets at market price. By transferring the bad assets of an institution to the bad bank, the banks clear their balance sheet of toxic assets but would be forced to take write downs. Shareholders and bondholders stand to lose money from this solution (but not depositors). Banks that become insolvent as a result of the process can be recapitalized, nationalized or liquidated.

A well-known example of a bad bank was Grant Street National Bank, which was created in 1988 to house the bad assets of Mellon Bank. The financial crisis of 2008 revived interest in the bad bank solution, as managers at some of the world's largest institutions contemplated segregating their nonperforming assets into bad banks.

Federal Reserve Bank Chairman Ben Bernanke proposed the idea of using a government-run bad bank in the recession following the subprime mortgage meltdown in order to clean up private banks with high levels of problematic assets and allow them to start lending again. An alternate strategy considered was a guaranteed insurance plan that would keep the toxic assets on the banks' books but eliminate the banks' risk and pass the risk on to taxpayers.

Investment dictionary. . 2012.

Look at other dictionaries:

  • bad bank — UK US noun [C] BANKING, FINANCE, ECONOMICS ► a bank that takes bad assets (= assets that have lost their value) and bad loans (= debts that are unlikely to be paid back) from other banks or organizations and deals with them in order to help with… …   Financial and business terms

  • Bad Bank — [ bɛt bɛŋk ], die; , s <englisch> (Bank, die schlechte Kredite von anderen Banken übernimmt) …   Die deutsche Rechtschreibung

  • Bad Bank — Eine Bad Bank (engl. aus bad debt bank) oder Abwicklungsbank, Auffangbank ist ein gesondertes Kreditinstitut[1] zur Aufnahme von Derivaten und Zertifikaten von in Zahlungsschwierigkeiten geratenen Emittenten und zur Abwicklung sogenannter… …   Deutsch Wikipedia

  • bad bank — UK / US noun Word forms bad bank : singular bad bank plural bad banks economics a bank created by the state to buy private banks bad debts (= money owed to them that will never be paid) so that the private banks can continue to lend money The… …   English dictionary

  • Bad bank — Consortium de réalisation Pour les articles homonymes, voir CDR. Le Consortium de réalisation (CDR) est à l origine une structure ad hoc chargée de gérer le passif du Crédit lyonnais après la quasi faillite de la banque en 1993. Depuis la crise… …   Wikipédia en Français

  • bad bank — noun A bank created to specialize in the ownership of defaulted loans and their collection. Syn: collection bank …   Wiktionary

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  • Bank of New England — Corporation Former type Corporation Industry Banking Fate Bankruptcy liquidation P …   Wikipedia

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