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Bad banks

ch/ncy/AFP/dpaMay 13, 2009

The German cabinet has agreed on a plan to clean up toxic assets from bank balance sheets. In the run-up to the election, the issue has become highly politically charged.

https://p.dw.com/p/Hp6P
German Finance Minister Peer Steinbrück, in a grey suit and red tie, spreads his arms in parliament.
Steinbrueck wants to reassure voters they won't wear the cost of the bail-outImage: ap

The scheme, which forms a key element of Berlin's bid to turn Europe's biggest economy around, would allow banks to park their toxic assets for up to 20 years, in specially created institutions. Banks would receive government backed bonds in return.

Finance Minister Peer Steinbrueck said the banks would still be held responsible for the toxic assets and, in the long run, they would bear the cost of transferring and holding the assets.

Just five months out from a national election, the issue has proved politically prickly.

Politicians are torn between the pressing need to revive Germany's foundering banking sector and burdening taxpayers with a huge bank bailout.

Berlin hopes that once the toxic holdings have been removed from banks' balance sheets, they will begin lending to each other and to businesses and consumers again. That is meant to jolt the German economy back to life.

Economic forecasters predict 6 percent shrinkage in Europe's biggest economy in 2009.

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What is a bad bank?

Welcome back. Germany's efforts to prop up the country's banking sector have so far failed to restore enough liquidity to the system. Many financial institutes are still saddled with billions in risky investments, some of which are worth nothing on the open market. For weeks now, legislators and finance experts have been talking about whether this problem could be solved with toxic asset repositories that have come to be known as 'bad banks'. Now the German cabinet HAS approved a draft law that would pave the way for such a measure.
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Sweden's bad bank scheme

A central bone of contention is whether to establish several 'bad banks', or just one institute, where all of the risky investments could be divested. In either case, the purpose of the 'bad bank' model is to allow banks to purge their balance sheets of toxic assets. Once in the 'bad bank', the hope is that a market for these assets will develop as soon as the economy begins to pick up again. Such models were tried with some success in Sweden during the 1990's.
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Euro notes behind a radioactive symbol

German government steps in to clean up banks' toxic assets

German government steps in to clean up banks' toxic assets

The German government has drawn up a draft plan to clean up toxic assets from banks' balance sheets, a key part of Berlin's bid to turn around Europe's biggest economy. (12.05.2009)
May 12, 2009
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