"'Bad Bank' Strategy: It’s Harder This Time" outlines the principles, advantages and disadvantages of using a 'good bank', 'bad bank' structure that has been widely adopted in Europe following the financial crisis.
This structure separates the bank’s troubled assets into a separate legal entity – the 'bad bank' – thereby allowing management to “draw a line” under the errors of the past and focus on rebuilding the remaining 'good bank'.
One of the key issues is that many of the 'bad banks' established during the recent crisis in Europe are likely to take 20 or more years to wind down. Throughout this period, they must continuously choose the optimal liquidation strategy according to the trade off it creates between returns and operating costs, risks, and liquidity burdens. To make them more palatable, 'bad banks' should begin to pursue the cost mitigation opportunities outlined in this perspectives piece.
