At the time of this article, it’s still too early to know if ‘bad banks’ will return due to our current pandemic-induced, economic meltdown.
Remember 2009? Then, financial institutions and regulators worldwide took matters into their own hands, clamoring to address the lingering effects of troubled assets on bank balance sheets. One approach was a series of initiatives to sell off troubled assets. Another was to form ‘good banks’ and ‘bad banks’, when financial institutions would remove troubled assets and discontinued business lines into a new entity.
The ‘good’ bank, free of troubled assets, hoped to restore investor and market confidence, making it easier to raise capital at lovable rates. And they could get back to lending. And it worked!
The ‘bad’ bank then focused on liquidating bad assets, and maybe retaining business operations. And that worked, to some degree.
So…is that where we’re heading?
There are plenty of critics who don’t like the idea of ‘bad’ banks. What if the pandemic and economic recovery drags on and on and those banks become warehouses for bad loans? The bad assets don’t go away; the losses have to be shared between investors and taxpayers, and pricing mismatches between the buyer and seller will persist. Finally…who wants to buy bad assets from the bank during a pandemic?[Psssst…Faller Financial looks at non-performing residential and commercial real estate assets.]
So the jury’s still out on whether or not ‘bad’ banks are back, or coming back. But one thing’s for sure: the longer the wait for a COVID-19 vaccine, the more financial institutions are gonna have to take a long look at their troubled assets.
What do you think? Email me at email@example.com.
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Photo by Mario Dobelmann on Unsplash