IDEAS home Printed from
   My bibliography  Save this article

Bad banks: a proposal based on German financial history




In conventional bad bank models, the estimated fundamental value of the illiquid assets is paid to the ailing bank, thereby leaving considerable economic risk with the asset management company. In this paper, a different approach is proposed which combines the bad bank solution with equalization claims, an instrument that has successfully been used in two previous German debt crises. The main idea is to temporarily swap toxic assets for government bonds with an open maturity date. This approach not only leaves total losses with the banks, but also avoids the problem of evaluating the toxic assets in advance. The current German bad bank legislation largely follows this idea, but suffers severely from unnecessary complexity and lack of participation by commercial banks. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Ulrich Suntum & Cordelius Ilgmann, 2013. "Bad banks: a proposal based on German financial history," European Journal of Law and Economics, Springer, vol. 35(3), pages 367-384, June.
  • Handle: RePEc:kap:ejlwec:v:35:y:2013:i:3:p:367-384 DOI: 10.1007/s10657-011-9239-6

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Michaela Posch & Stefan W. Schmitz & Beat Weber, 2009. "EU Bank Packages: Objectives and Potential Conflicts of Objectives," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 17, pages 63-84.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-472, May.
    3. Felton, Andrew & Reinhart, Carmen M. (ed.), 2009. "The First Global Financial Crisis of the 21st Century Part II: June–December, 2008," Vox eBooks, Centre for Economic Policy Research, number p199.
    4. John Goddard & Phil Molyneux & John O.S. Wilson, 2009. "The financial crisis in Europe: evolution, policy responses and lessons for the future," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 17(4), pages 362-380, November.
    5. 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.
    6. Demirguc-Kunt, Asli & Detragiache, Enrica, 2002. "Does deposit insurance increase banking system stability? An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1373-1406, October.
    7. Martin Schürz & Markus Schwaiger & Julia Übeleis, 2009. "A Review of the Impact of the Crisis on Austria’s Financial Sector," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 17, pages 54-62.
    8. Asli Demirguc-Kunt & Edward J. Kane, 2002. "Deposit Insurance Around the Globe: Where Does It Work?," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 175-195, Spring.
    9. Michael D. Bordo, 2008. "An Historical Perspective on the Crisis of 2007-2008," NBER Working Papers 14569, National Bureau of Economic Research, Inc.
    10. James Crotty, 2009. "Structural causes of the global financial crisis: a critical assessment of the 'new financial architecture'," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 563-580, July.
    11. 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.
    12. Sarno, Lucio & Taylor, Mark P., 1999. "Moral hazard, asset price bubbles, capital flows, and the East Asian crisis:: the first tests," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 637-657, August.
    13. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
    14. Xavier Freixas, 2010. "Post-crisis challenges to bank regulation," Economic Policy, CEPR;CES;MSH, vol. 25, pages 375-399, April.
    15. Dorothea Schäfer & Klaus Zimmermann, 2009. "Bad bank(s) and the recapitalisation of the banking sector," Intereconomics: Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 44(4), pages 215-225, July.
    16. Demirguc-Kunt, Asli & Huizinga, Harry, 2004. "Market discipline and deposit insurance," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 375-399, March.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Pandey, Ashish, 2016. "High Bids and Low Recovery: A Possible Case for Non-Performing Loan Auctions in India," MPRA Paper 75254, University Library of Munich, Germany.

    More about this item


    Financial crisis; Bad banks; German history; Equalisation claims; E44; G01; N24;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:ejlwec:v:35:y:2013:i:3:p:367-384. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.