Bad Bank

A Bad Bank ( engl. from bad debt bank, German Bank for bad obligations ), even clearing bank, Abwicklungsanstalt or collecting bank is a separate bank for holding derivatives and certificates that find themselves in financial difficulties issuers, and to cover so-called non-performing loans in need of redevelopment banks. The aim is to transfer the credit risk to third parties. As part of the deal with a banking crisis (such as the current financial crisis ), the transfer of such loans into a settlement bank for which Assumed loan portfolio of State assumes the liability of its central bank, a deposit insurance fund or a banking group, present a procedure to avert a serious insolvency.

On the bad bank concept was resorted during the financial crisis starting in 2007, among others, Germany and the USA.


Loans are always subject to the risk that the borrower can not repay the credit risk. The amount of uncollectible loans fluctuate with the business cycle and with the care in the credit check. To cover exposed to risks demands the bank must with equity (see Basel II, Principle I). Any excess of the loan defaults, the portable from the bank sum, so that the minimum capital requirements for credit risk are not being met, the Bank may terminate its business permit be revoked, so they must be handled. Under certain circumstances, the bank insolvency must register. If several banks simultaneously affected, it is called a banking crisis.

The winding-up or insolvency of a bank ( or even many banks ) leads to a shakeout in terms of a competitive market economy. However, it has extensive and in some unforeseeable consequences for creditors, investors and other debtors. The trust also in other banks decreases, and the money investors tend to be more careful. This is particularly noticeable among other things, that to savings or loans from other banks, a risk premium must be paid in the form of a higher interest rate. If in the worst case, the total bank lending restricted, so it is called a credit crunch. In such a situation necessary for the normal operations of companies liquidity is at risk and thus also the production or supply of goods, although there is demand.

For this reason, many attempts to avoid the insolvency of banks and the emergence of banking crises. One of the possible instruments is the establishment of a bad bank. However, there are still other means, such as nationalization or government guarantees.

Reasons for the establishment

A basic requirement for the banking business is the trust of the business partners and customers in the creditworthiness of the Bank. At high losses due to loan defaults this is threatened. The main objective of rehabilitation must therefore be to rebuild trust. This requires, among others, a recapitalization, ie the injection of new equity since the previous by the losses (partial ) has been lost. In addition, it is especially important to ensure that the loan portfolio of the Bank has no further unknown risks more.

This is difficult, especially as fixed are the true risks of a problem loan only after its full implementation. Clarity would therefore offer only as rapid as possible. A rapid recovery in the crisis but would reduce the revenues significantly.

The outsourcing of the loans in the bad bank will therefore provide the opportunity to achieve the best possible recovery rates by loan restructuring or liquidation of securities without time pressure. On the other side of the bank to be rehabilitated should be immediately relieved of the risk of the outsourced credit.


The settlement bank ( bad bank ) buys from the overall portfolio, non-performing loans. To this end, the Bank is to be rehabilitated from the loans to the bad bank and receives, if the loans do not turn out to be completely worthless, a purchase price that is the nominal value of loans net of expected losses. The risk of higher losses ( and the chance to lower loss ) then transmits the bad bank. Result, the Bank is to be rehabilitated exempt from liability for this portfolio. They also must hold for the selling to the bad bank 's portfolio is no more equity. There is, however with the transaction in a book loss in the amount of the discount. If the bank can not wear these from the equity that it is insolvent or " broke " and needed fresh capital. This process acts like an injection of equity capital ( does not serve any supply of equity avert a bankruptcy. )

The settlement bank itself must get fed from the outside sufficient capital to bear the risks of the loan portfolio can. Since she works as a special collection agencies and is not designed for continuous operation, but is resolved as special purpose vehicle after completion of the liquidation of the portfolio, this can be done technically guarantees of the State, unless the State has an interest. The extent to which the state must then be taken out of the sureties in claim depends on the result of the settlement. Until this is fixed, it may take much time. Details of the implementation in Germany are regulated by the Law on the further development of the financial market stabilization, which was announced on 22 July 2009 in the Federal Law Gazette. In this Act are provided as the maximum period for repayment twenty years.

Regulatory Discussion

Core of the concept of the bad bank is the assumption of liability of the outsourced in the bad bank risks by third parties (eg the state). The regulatory policy is questionable. Firstly, the beneficiary banks are relieved by the risk to such claims, but had in the past, the risk premiums that were associated with the business, recognized as income. This aspect can about the tees, with which the claims were taken over by the bad bank, or be taken into account by debtor warrants.

Above all, however, the problem of moral hazard at the center of regulatory debate: The fact that banks can expect that a settlement bank decreases them the risks and transfers it to the state, an incentive that institutions ( in reliance on a safe risk transfer ) to take high risks.

Furthermore, it must be noted that a bad bank can not act as a classic market participants in the market. Although trust in other banks can be restored, but a trust in a bad bank by market participants can not be expected. Therefore, a bad bank is instructed to its re- incorporation in a different database on government funding. This would amount to a partial nationalization.


As part of the Swedish banking crisis from 1990 to 1992, the concept of bad bank has been successfully used. The non-performing loans (after all, in the amount of 120 percent of gross domestic product ) were collected ( Office for Bank support) in Bankstödsnämnden and settled there successfully. However, before the Northern banks were nationalized, so that the " good bank " and the bad bank the same owner had. As the property prices ( whose expiration had triggered the crisis ) consolidated themselves back in the sequence, it was possible to a large extent offset the losses on the loans back. The concept of bad bank has been used in the USA during the Great Depression and the Savings -and -loan crisis. At that time, formed Bad Banks under the name of the Resolution Trust Corporation (RTC).

The Bank Aktiengesellschaft (BAG ), based in Hamm, a nearly 100 - percent subsidiary of the Federal Association of German Cooperative Banks and Raiffeisen banks, which originally emerged from the hammer bank scandal in the 1980s. The business model of the mode provides for the cooperative banking group terminated by the member banks or to take exceptional care intensive loans due to necessary remediation measures; it operates BAG nationwide.

After the Berliner Bank scandal of unsaleable property part ( BIH) was founded in 2001 by the Bank Gesellschaft Berlin separated and in the Berlin Immobilien Holding GmbH outsourced, which also contains the public guarantees in the double-digit billions, among others. The Bank Gesellschaft Berlin was then sold to the German Savings Banks and Giro Association.

On 24 February 2003, the Handelsblatt reported under the heading " indiscretion after summit meeting - Bad Bank is causing a stir ", ie at a time when a global real estate, credit, banking, public finance and global economic crisis still no question was ( but insiders and experts obviously already knew that only with "bad banks" would the global financial and economic system could keep on going ) through detailed plans for establishing one or more bad banks in Germany.

Even in the financial crisis from 2007 bad banks were created in several countries and discussed in many countries. In Germany intends HSH Nordbank, the formation of a bad bank. Since the City of Hamburg would vouch in this case, the establishment of a bad bank is still highly debated at the political level. Also got the formerly largest bank in the world, Citigroup, in early 2009 into difficulties. She was allowed to convict problematic assets and, among other consumer lending and trading activities in a bad bank. On 13 May 2009, the German Federal Government, as already mentioned, approved the draft law on the further development of the financial market stabilization, which is to promote the creation of bad banks.

On 11 December 2009 the first EAA (EAA ) of the Federal Agency for Financial Market Stabilisation ( FMSA ) was built. The EAA has the task to take on risk positions of WestLB AG and by 2028 to handle so that the loss is minimized. The EAA claims to be no bad bank is, but sometimes referred to as. It is a public Abwicklungsanstalt and as such it is neither a financial institution operates it permit transactions pursuant to the EU Directive 2006/48/EC of 14 June 2006 for the purposes of the Banking Act still. The portfolio includes the shares of Westdeutsche Immobilien Bank, an earlier 100 % subsidiary of WestLB.

2 October 2010 the nationalized bank holding company Hypo Real Estate ( HRE) transferred threaten the existence of securities and loans of over 12,500 individual items in a value of around 173 billion euros in the newly founded FMS value management; about 7.4 billion euros of which were debt of Greece (May 2011).

Further use of the term

The term Bad Bank will continue to consistently used for special credit institutions that specialize in the acquisition and exploitation of non-performing loans. For this, the above applies. However, the bank has, the loan portfolio sold, not necessarily stand in the crisis. Credit sales may also have other business policy reasons.

Also for the organizational units within a bank which deal with the recovery of non-performing loans is partly spoken in the language of a bad bank. Thus, the Dresdner Bank in 2003 -level and 2005 non-performing loans in the Group's own subsidiary IRU (Institutional Restructuring Unit ), which is sometimes referred to by the public as a bad bank.


In contrast to the bad bank zombie bank refers to a bank that conducts banking business continues despite bankruptcy, because bad loans are not depreciated.