Sunday, September 2, 2012

The curious case of bad banks; a case in point - Spain

Bankia HQ - Madrid

Assume that you are unable able to pay a big loan taken from a bank. What will happen to you? Most probably, the bank may take over and auction the assets pledged by you. Now, think what will happen, if a bank is in the same position?

Interestingly, one measure is to transfer the Non Performing Assets (NPA) to another entity, called Bad Bank. After transferring the assets to band bank, the original one can restart the process of lending!!!

According to economists there are many advantages in creating a bad bank;

1. The original entity can restart the process of lending.
2. A separate entity - bad banks - can concentrate on offloading or solving the bad loans.
3. Original bank can clean her balance sheets.

Well, Spain is also going to create a bad bank - 'Banko malo' - and transfer all toxic assets to it. For transferring the 'toxic' assets, banks will get cash, debt or shares.

Shares in the new bad bank is fine, after all it’s their toxic asset, but cash and debt? The value of bank loans at risk (toxic assets) in Spain is a whopping 156bn euros (around USD 196bn).

It may be a good idea economically, but ethically? Isn't it like, I am doing something wrong and asking somebody else to suffer the penalty? Which allows me to continue my way of living (may be with a loss of reputation). Isn't it the same thing happening here as well?

I hope that, along with Spanish government, bad bank will be able to make a profit in the long term.



Photo courtesy - Wikipedia  (Author - Luis GarcĂ­a) - Later modified to suit this article

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