Any bad bank consideration faces two opposing circumstances. – On the one hand, banks’ balance sheets are to be relieved of securities for which – at least temporarily – there is no functioning market, and – for which there is a threat of substantial book losses, because the value adjustments affect the banks’ equity capital and thus also reduce their ability to grant loans. – On the other hand, however, – the owners of the banks should not be released from liability for a business policy that has caused this distress; because – this would create a moral hazard problem: losses would be passed on to the state or the taxpayers. – The German bad bank model attempts to strike a balance between these two interests. – See investment liability, bank, systemic, bad bank, bail-in, equity, hard, Financial Market Stabilization Act, mandatory convertible bond, loss-sharing scheme, confidence bubble, mandatory convertible bond.
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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