"The cardinal maxim is that any aid to a present bad bank is the surest mode of preventing the establishment of a future good bank" wrote the British economic journalist Walter Bagehot in 1873. In his evaluative analysis, Bagehot stretched the potential problems that may arise as a result of government's interventions. Although there has been more than a century since his comments on the pre-mature idea of a bad bank and interventions, the discussions on the utility of bad banks persists in today's financial spectrums. In economic terminology, bad banks are used to take risky assets from otherwise good banks. This essay will first address the idea of so-called bad banks as a new financial instrument and then will focus on the analysis of their impacts on crises development.
Inhaltsverzeichnis
- Introduction:
- Bad Banks as Financial Instruments:
- Bad Banks' Impact on the Development of Financial Crises:
- Conclusion:
Zielsetzung und Themenschwerpunkte
This essay aims to analyze the concept of "bad banks" as a financial instrument, examining their potential benefits and drawbacks in the context of financial crises. The essay explores the role of bad banks in absorbing toxic assets from healthy banks, mitigating credit crunches, and stabilizing the banking system. It also delves into the potential negative impacts of bad banks, including moral hazard, subsidies for corporate bankruptcy, and loss of confidence.
- The role of bad banks in absorbing toxic assets and mitigating credit crunches.
- The potential for moral hazard and its impact on banking practices.
- The unintended consequences of bad banks, such as subsidies for corporate bankruptcy.
- The potential for bad banks to erode confidence in the banking system and the economy.
- The trade-offs involved in implementing bad banks and their potential long-term effects.
Zusammenfassung der Kapitel
The introduction provides a historical context for the concept of bad banks, tracing the idea back to Walter Bagehot's writings in the 19th century. It defines bad banks as institutions designed to acquire non-performing assets from healthy banks, thereby stabilizing the banking system during times of crisis.
The second section delves into the mechanics of bad banks as financial instruments. It explains how bad banks operate, their organizational structure, and the trade-offs involved in their implementation. The section also discusses different approaches to risk assessment and asset valuation, highlighting the Swiss and German models.
The third section examines the potential impact of bad banks on the development of financial crises. It presents three main arguments: moral hazard, subsidies for corporate bankruptcy, and loss of confidence. The section explores how bad banks can incentivize risky behavior, provide unintended subsidies for failing companies, and erode public trust in the financial system.
Schlüsselwörter
The key terms and focus themes of the text include bad banks, financial instruments, toxic assets, credit crunches, moral hazard, corporate bankruptcy, loss of confidence, financial crises, banking system, and economic stability. The essay examines the role of bad banks in mitigating financial crises while also exploring their potential negative consequences.
- Quote paper
- Kaan Akkanat (Author), 2012, The Financial Cesspools. A Critical Analysis of "Bad Banks" as Financial Instruments, Munich, GRIN Verlag, https://www.grin.com/document/293832