Greek government considers creating a big “bad bank”

Posted by in Economy

 Greek daily Imerisia reports that the Greek government is considering submitting legislation to create a bad bank to take non-performing loans off the books of Greek banks. The move would not only aid banks but give more time to those struggling to repay loans, according to the article. The paper also notes that the recapitalisation need of Greek banks has reached €33bn, up from €27.5bn.Daily Kathimerini reports that the Greek government has announced that it met its fiscal targets for 2012, with a primary surplus of €435m. (via openeurope)

What is a bad bank?

Bad bank is a term for a financial institution created to hold non-performing assets owned by a state guaranteed bank. Such institutions have been created to address challenges arising during an economic credit crunch wherein private banks are allowed to take problem assets off their books.

Criticism

Critics of bad banks argue that the prospect that the state will take over non-performing loans encourages banks to take undue risks, which they otherwise would not. Another criticism is that the option of handing the loan over to the bad bank becomes essentially a subsidy on corporate bankruptcy. Instead of developing a company that is temporarily unable to pay, the bondholder is given an incentive to sue for bankruptcy immediately, which makes it eligible for sale to a bad bank. Thus, it can become a subsidy for banks on the expense of small businesses (see more here)

PS Excellent! Greek taxpayers will have yet another pleasure to  support the banks and take the financial burden of the bad bank on their shoulders.