tailieunhanh - Bad Bank(s) and Recapitalization of the Banking Sector

With the value of their toxic assets written down to zero, a number of banks will no longer meet the legislated core capital requirement. The government should take a stake in these banks in order to recapitalize them. The prior removal of troubled assets will limit the risk taken on by the government and provide good prospects for the appreciation of its investment. The government’s risk of loss (through the bad bank) and opportunity for success (through the rescued good bank) would thus be clearly separated from one another. This would also contribute to transparency. . | I z A P O L I C Y P A P E R S E R I E S IZA Policy Paper No. 10 Bad Bank s and Recapitalization of the Banking Sector Dorothea Schafer Klaus F. Zimmermann June 2009 Forschungsinstitut zur Zukunft der Arbeit Institute for the Study of Labor Bad Bank s and Recapitalization of the Banking Sector Dorothea Schafer DIW Berlin and Free University of Berlin Klaus F. Zimmermann IZA DIW Berlin CEPR and University of Bonn Policy Paper No. 10 June 2009 IZA . Box 7240 53072 Bonn Germany Phone 49-228-3894-0 Fax 49-228-3894-180 E-mail iza@ The IZA Policy Paper Series publishes work by IZA staff and network members with immediate relevance for policymakers. Any opinions and views on policy expressed are those of the author s and not necessarily those of IZA. The papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the corresponding author. IZA Policy Paper No. 10 June 2009 ABSTRACT Bad Bank s and Recapitalization of the Banking Sector With banking sectors worldwide still suffering from the effects of the financial crisis public discussion of plans to place toxic assets in one or more bad banks has gained steam in recent weeks. The following paper presents a plan how governments can efficiently relieve ailing banks from toxic assets by transferring these assets into a publicly sponsored work-out unit a so-called bad bank. The key element of the plan is the valuation of troubled assets at their current market value - assets with no market would thus be valued at zero. The current shareholders will cover the losses arising from the depreciation reserve in the amount of the difference of the toxic assets current book value and their market value. Under the plan the government would bear responsibility for the management and future resale of toxic assets at its own cost and recapitalize the good bank by taking an equity stake .