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