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Bad Banks: The Case of Germany

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  • Cordelius Ilgmann
  • Ulrich van Suntum

Abstract

This paper discusses the instrument of equalisation claims, which has successfully been used in two previous German debt crises as a method for stabilizing the balance sheets of financial institutions. A modern version of this method would swap temporarily illiquid assets for government bonds with open maturit, in order to avoid the problem of evaluating the toxic assets in advance. Not only will this method save taxpayers' money, but it also upholds the market principle of liability, thereby avoiding incentives for inefficient risk-prone behaviour in the financial sector. The current German bad bank approach principally follows this approach, but severely suffers from unnecessary complexity and voluntary participation.

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File URL: http://www.wiwi.uni-muenster.de/cawm/forschen/Download/Diskbeitraege/DP_22-Ilgmann-Van-Suntum-Bad-banks.pdf
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Paper provided by Institute of Spatial and Housing Economics, Munster Universitary in its series Working Papers with number 200110.

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Handle: RePEc:muc:wpaper:200110

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Keywords: Financial Crisis; Bad Banks; German History; equalisation claims;

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-72, May.
  3. Michael D. Bordo, 1989. "The lender of last resort: some historical insights," Proceedings 234, Federal Reserve Bank of Chicago.
  4. Charles Calomiris & Joseph R. Mason, 2003. "How to Restructure Failed Banking Systems: Lessons from the U.S. in the 1930's and Japan in the 1990's," NBER Working Papers 9624, National Bureau of Economic Research, Inc.
  5. Michael D. Bordo, 2008. "An Historical Perspective on the Crisis of 2007-2008," NBER Working Papers 14569, National Bureau of Economic Research, Inc.
  6. Stephen G. Cecchetti, 2008. "Crisis and Responses: the Federal Reserve and the Financial Crisis of 2007-2008," NBER Working Papers 14134, National Bureau of Economic Research, Inc.
  7. James Crotty, 2008. "Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’," UMASS Amherst Economics Working Papers 2008-14, University of Massachusetts Amherst, Department of Economics.
  8. L. Randall Wray, 2009. "The rise and fall of money manager capitalism: a Minskian approach," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 807-828, July.
  9. Jo�o A. C. Santos, 2006. "Insuring Banks Against Liquidity Shocks: The Role of Deposit Insurance and Lending of Last Resort," Journal of Economic Surveys, Wiley Blackwell, vol. 20(3), pages 459-482, 07.
  10. Reinhart, Carmen & Felton, Andrew, 2009. "The first global financial crisis of the 21st century: Part II, June-December, 2008," MPRA Paper 13604, University Library of Munich, Germany.
  11. Reinhart, Carmen M. & Rogoff, Kenneth S., 2009. "The Aftermath of Financial Crises," Scholarly Articles 11129155, Harvard University Department of Economics.
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