During the Financial Crisis 2007-2010, which was the result of housing bubble in the
United States in 2006, commercial banks rapidly decreased the amount of commercial
lending worldwide. So called subprime credits made the assets of commercial banks
less worth during a short period. It was the cause for the credit crunch in many
economies. Because many enterprises have to rely on debt capital, which they lend from
commercial banks to finance their investments, the credit crunch hit such enterprises
very hard. The outcome is that the whole economy suffers. Many governments
elaborated the bad bank concept to solve the problem of decreased commercial lending,
also Germany. It means, that banks will be allowed to start special purpose vehicles
(SPV) for holding the subprime credits and to bring such subprime credits out of the
balance sheet of the bank. In Anglo-Saxon countries there are two other terms in use for
SPV: (loan) recovery agency and asset management company. According to Homoelle,
Ruff and Tuerr1 in theory and praxis there are many variants of bad bank models
existing. Until now the question which model is most successful, became insufficient
exploration.
German government adopted two different models of bad banks and proposed the
Financial Market Stabilisation Act (FMStFG), which became effective on July 22th
2009.2 After that some banks used this opportunity and transferred their subprime assets
to such SPV.
The scope of the work is first to evaluate why exactly commercial banks decreased the
commercial lending, second to analyse German bad bank concept and then to work out
the incentives of this concept for more commercial lending by commercial banks and to
show some examples of implementation of bad bank concept by German banks. At the end the answer on the question, whether the bad bank concept increases the ability and
willingness of German commercial banks to make more commercial credits available or
not, will be given in this term paper.
Table of Contents
1. Introduction
2. Why Commercial Banks Decreased the Commercial Lending?
2.1. Financial Crisis 2007-2010
2.2. Decrease in Commercial Lending
3. German Bad Bank Concept
3.1. How Does the Bad Bank Model Work?
3.1.1. Special Purpose Vehicle Model
3.1.2. Consolidation Model
3.2. Purposes
4. First Experiences with Bad Banks
4.1. WestLB AG
4.2. Hypo Real Estate Holding AG
5. Conclusions
Research Objectives and Themes
This paper examines how the implementation of the "Bad Bank" concept in Germany influences the capacity and willingness of commercial banks to increase lending to the private sector following the 2007-2010 financial crisis.
- Causes of the global financial crisis and the subsequent credit crunch in Germany.
- Mechanisms of the German "Bad Bank" models (SPV and Consolidation).
- Practical implementation of bad bank models at WestLB AG and Hypo Real Estate Holding AG.
- Evaluation of the impact of asset offloading on bank liquidity and capital ratios.
- Analysis of the relationship between bad bank policies and future lending behaviors in the context of Basel III.
Excerpt from the Book
1. Introduction
During the Financial Crisis 2007-2010, which was the result of housing bubble in the United States in 2006, commercial banks rapidly decreased the amount of commercial lending worldwide. So called subprime credits made the assets of commercial banks less worth during a short period. It was the cause for the credit crunch in many economies. Because many enterprises have to rely on debt capital, which they lend from commercial banks to finance their investments, the credit crunch hit such enterprises very hard. The outcome is that the whole economy suffers. Many governments elaborated the bad bank concept to solve the problem of decreased commercial lending, also Germany. It means, that banks will be allowed to start special purpose vehicles (SPV) for holding the subprime credits and to bring such subprime credits out of the balance sheet of the bank. In Anglo-Saxon countries there are two other terms in use for SPV: (loan) recovery agency and asset management company. According to Homoelle, Ruff and Tuerr in theory and praxis there are many variants of bad bank models existing. Until now the question which model is most successful, became insufficient exploration.
German government adopted two different models of bad banks and proposed the Financial Market Stabilisation Act (FMStFG), which became effective on July 22th 2009. After that some banks used this opportunity and transferred their subprime assets to such SPV.
Summary of Chapters
1. Introduction: Outlines the origins of the global financial crisis, the resulting credit crunch, and the introduction of the German Bad Bank concept to stabilize the banking sector.
2. Why Commercial Banks Decreased the Commercial Lending?: Discusses the macroeconomic causes of the financial crisis and details the contraction in commercial lending between 2008 and 2009.
3. German Bad Bank Concept: Explains the legislative framework of the Financial Market Stabilisation Act and details the operational mechanics of the Special Purpose Vehicle and Consolidation models.
4. First Experiences with Bad Banks: Analyzes the real-world application of the bad bank concept through case studies of WestLB AG and Hypo Real Estate Holding AG.
5. Conclusions: Evaluates the effectiveness of bad banks in improving capital ratios and discusses the potential long-term impacts of Basel III on commercial lending.
Keywords
Bad Bank, Commercial Lending, Financial Crisis, Special Purpose Vehicle, Consolidation Model, FMStFG, Credit Crunch, WestLB, Hypo Real Estate, Basel III, Asset Management, Liquidity, Debt-Equity Ratio, Financial Market Stabilisation, Banking Regulation.
Frequently Asked Questions
What is the core focus of this paper?
The paper investigates how the German government's "Bad Bank" concept aims to restore the commercial lending activities of banks that were negatively impacted by the 2007-2010 financial crisis.
What are the primary themes discussed?
Central themes include the transmission of the US housing bubble into a global credit crunch, the structural mechanics of German bad bank legislation, and the specific application of these models at major financial institutions.
What is the research goal?
The research seeks to determine whether transferring toxic assets into bad banks effectively increases the ability and willingness of commercial banks to issue new commercial loans.
Which scientific methodology is applied?
The paper utilizes a literature review and a comparative case study approach, analyzing bank reports and official government documents to assess the outcomes of the FMStFG implementation.
What does the main body cover?
It covers the causes of the credit freeze, explains the technical differences between the SPV model and the Consolidation model, and assesses the success of WestLB and HRE in using these vehicles.
Which keywords describe this work best?
Key terms include Bad Bank, FMStFG, credit crunch, commercial lending, special purpose vehicle, and financial market stabilization.
How does the SPV model differ from the Consolidation model?
The SPV model allows a bank to move specific risky assets into a dedicated vehicle, whereas the Consolidation model involves outsourcing entire business units to a federal workout entity.
Did the bad bank concept lead to an immediate increase in lending?
Not necessarily. While the banks improved their capital ratios and liquidity, actual lending often remained stagnant due to decreased demand in the broader economy.
What role does Basel III play in the author's analysis?
The author mentions Basel III as a future regulatory challenge, noting concerns that stricter capital requirements might counteract the lending improvements achieved through bad bank structures.
- Citation du texte
- Alexej Antropov (Auteur), 2010, How does the „Bad Bank“ Concept Influence the Commercial Banks’ Ability and Willingness to Increase Commercial Lending in Germany, Munich, GRIN Verlag, https://www.grin.com/document/170907
