Handbook of Critical Issues in Finance

Handbook of Critical Issues in Finance

Elgar original reference

Edited by Jan Toporowski and Jo Michell

This vital new Handbook is an authoritative volume presenting key issues in finance that have been widely discussed in the financial markets but have been neglected in textbooks and the usual compilations of conventional academic wisdom.

Chapter 2: Bad banks

David G. Mayes

Subjects: economics and finance, financial economics and regulation, post-keynesian economics


The global financial crisis has led to a resurgence of interest in and indeed use of the concept of ‘bad banks’. In essence a bad bank is created when a troubled bank is divided into a ‘good bank’ that can readily be sold or recapitalized at a cost acceptable to the shareholders/creditors, and a ‘bad bank’ that contains the remaining, impaired, assets. Indeed the term ‘bad bank’ is actually a misnomer as the entity is not a bank in the sense that it is registered, takes deposits and makes loans. It is normally an asset management company that works through the impaired assets, steadily realizing them for the best it can manage for the creditors/owners. To take a well-known example, Northern Rock, the UK bank that got into difficulty early in the crisis in August 2007, and was subsequently nationalized, has

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