After the 2008 financial crisis, the federal government introduced several different measures to help beleaguered financial institutions. One of these was the good bank-bad bank structure. This structure is still used today. And, is as relevant and useful as ever during the post-COVID-19 economic downturn.
What is the good bank-bank structure?
After banks started to feel the impact of the financial crisis, they found themselves struggling with ongoing losses from troubled assets. As they found it increasingly difficult to raise capital and maintain their stability, the government proposed that they solve the problem by essentially splitting themselves into two. They could keep their well-performing assets within the existing bank and create an entirely new one to house the struggling and depreciating assets. The ‘good bank’ would have better balance sheets and would be able to boost investor confidence and raise more capital. The ‘bad bank’ would act as a repository for those assets dragging the business down. The ‘bad bank’s exact goals,’ aside from becoming the home for bad assets, differ from one institution to another.
What is the purpose of this structure?
Why would a bank choose to adopt this structure? The innovation is quite simple. The goal of the good bank-bad bank concept is to help financial institutions to clean up their balance sheets. They do this by transferring poorly performing assets to the bad bank. As long as the two entities are not under common control, they will operate as separate entities, without the illiquid and troubled assets of the bad bank having any bearing on the assets or operations of the good bank. In this way, the good bank can ensure its continued operations and ability to attract investment.
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