The “bad bank”, and SPV (Special purpose vehicle). Many will say that all the houses are bad (as the dice are the usual joke, it is the institutions that lend you the umbrella when the sun is shining and you see it back when it rains). But the Bad bank (hereafter abbreviated to BB) configures a specific type of bank, whose pros and cons are exposed in the questions and answers below.
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Suppose that in a country there is a serious economic crisis. Many companies fail and can not repay their debts with banks on maturity; or, postpone the payment of interest. It’s news for businesses, and it’s obvious. But it is also bad news (the so-called “suffering”) and risk going into crisis too. This is the case, as far as companies are concerned, because the banks, the suffering, the money for businesses and businesses are more numerous. And in doing so the crisis is getting worse, because the grip on loans to the economic system is that crucial lubricant that is credit. In short, the crisis risks becoming chronic, if not screwing into a depressive spiral. Come out?
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The BB is a bank that is not a bank as we understand it (ie an institution that takes deposits and makes loans). It is, say, a company vehicle to which the “good bank” (we do not call it BB, if not confuse the ideas – let’s call it BM, the “mother bank”) transfers its claims, stranded or “suffered”. So the BM, relieved of those toxins that poisoned its budgets, can always do its job, return to lend money and raise capital, from depositors or bond holders who are no longer worried about the fate of the bank.
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But there are some details that are not clear. First: these bad debts are transferred to the BB for consideration or free of charge? Onerous, of course. And why is not it a free title?
If you are a free title, the BM fabbe will soon clear those credits as bad debts.
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For reasons of cause: because not all those credits are uncollectible (suffering does not mean death); and also because, if you cancel those credits “hic et simpliciter”, you have to register a translation in your budgets …
… but the bases do not already have a provision for doubtful debts that serve to absorb those losses?
… Yes, but the amount of suffering is a story that those funds are not enough. The cancellation of those credits is a title that has never been so easy.
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Okay, then those bad debts are transferred to the BB for consideration. But how expensive? Who is the price?
This is, of course, the fundamental point. Let’s say that the face value of those credits is 100. How much can you transfer? 20, 50, 80 …? Every loan in distress has a history and the chances of returning all or part of that credit are different. It is a case-by-case examination, and then to make an average of the results.
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So, let’s say that this value comes out of this average of 60. But what if, a price, and even taking into account the fund for bad debts, the bank ends up with unsustainable losses on the balance sheet?
It happens that at this point you can not use the BB.
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To avoid the failure of the BM you have to think about other solutions. Like the merging of the one with a more solid bank or the recapitalization of a state’s work, which in practice is a nationalization of the bank. The use of the BB is possible only in cases where a sale of non-performing loans at realistic prices is not a question of breaking the bank’s balance sheets.
Then we return to the sale for consideration. The BM collects, but who pays?
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In post-war economic history there have been many cases of BB in Washington DC and NY, with different solutions for financing. The mechanism devised today for US is as follows. A company vehicle is created (SPV, Special purpose vehicle), legally distinct from the BM, to which the BM transfers the bad debts. The SPV securities these loans: that is, they “pack them”, creating bonds that are guaranteed (so to speak) from the underlying suffering. These bonds are sold to the public, to institutional or private investors, and, with the proceeds of this sale, BB pays the agreed value to BM.
Are these bonds all the same? They are divided into tranches, depending on the degree of risk of the underlying bad debts. But what is the interest of investors to buy these securitized bonds? These bonds will yield an interest that can be judged interesting by investors.