Bad Bank

AAA

DEFINITION of '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.

INVESTOPEDIA EXPLAINS 'Bad Bank'

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.

RELATED TERMS
  1. Investment Bank - IB

    A financial intermediary that performs a variety of services. ...
  2. Bank Credit

    The amount of credit available to a company or individual from ...
  3. Chapter 11

    Named after the U.S. bankruptcy code 11, Chapter 11 is a form ...
  4. Nonperforming Asset

    A debt obligation where the borrower has not paid any previously ...
  5. Bank

    A financial institution licensed as a receiver of deposits. There ...
  6. Technical Bankruptcy

    The state of a company or person who has defaulted on a financial ...
RELATED FAQS
  1. Do small banks ever act as custodians?

    Generally speaking, the market for custodian bank services is dominated by large banks. The best banks tend to grow in size, ... Read Full Answer >>
  2. Will technology ever disrupt the role of the custodian bank?

    Custodian banks, along with other financial institutions that hold custodian accounts, are likely to be disrupted but not ... Read Full Answer >>
  3. What debt to equity ratio is common for a bank?

    The average debt-to-equity ratio for retail and commercial U.S. banks, as of January 2015, is approximately 2.2. For investment ... Read Full Answer >>
  4. What is the average profit margin for a company in the banking sector?

    The average net profit margin for retail or commercial banks, as of January 2015, is approximately 18%. This compares favorably ... Read Full Answer >>
  5. What is the difference between a bank's liquidity and its liquid assets?

    A company's liquid assets can easily be converted into cash to meet financial obligations on short notice. Liquidity is the ... Read Full Answer >>
  6. What percent of capital should banks hold relative to its risk weighted assets?

    As of 2015, banks are required to hold 4.5% of common equity of risk-weighted assets under the provisions of the Basel III ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    5 Signs Of A Credit Crisis

    These indicators can illuminate the depth and severity of problems in the credit markets.
  2. Options & Futures

    Dialing In On The Credit Crisis

    Would a similar crisis have occurred if iPhone investors were offered the same loan options as homeowners?
  3. Insurance

    Fannie Mae, Freddie Mac And The Credit Crisis Of 2008

    Is the U.S. Congress' failure to rein in these mortgage giants to blame for the financial fallout?
  4. Options & Futures

    Mark-To-Market Mayhem

    Did this accounting convention contribute to the credit crisis of 2008? Find out here.
  5. Economics

    Why Working Doesn't Add Up For Many Women

    A type of tax deduction for Japanese stay-at-home wives puts a barrier on women working full time in the country.
  6. Economics

    Explaining Risk-Weighted Assets

    Risk-weighted assets is a banking term that refers to a method of measuring the risk inherent in a bank’s assets, which is typically its loan portfolio.
  7. Economics

    Explaining Tier 1 Capital

    Tier 1 capital refers to the core capital a bank must maintain in relation to its assets.
  8. Chart Advisor

    Trade Strong Trends in Financials with this ETF

    The strong move on the chart of the XBE ETF suggests that now could be the ideal time for traders to look for niche stocks to ride the upward momentum.
  9. Personal Finance

    What Skills Do You Need For An Investment Banking Job?

    Aspiring for the best paid investment banking jobs? Here is the list of top skills that investment banks look for in job candidates.
  10. Personal Finance

    5 Financial Tools You Can Throw Out The Window

    Bank deposit slip: what's that? Everyday tools of our financial life that went from indispensable to obsolete.

You May Also Like

Hot Definitions
  1. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  2. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  3. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  4. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  5. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  6. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
Trading Center