Bad banks are established to take on the bad loans of underperforming banks, enabling them to come out of the financial rut. In papers, the theory works seamlessly. The original bank gets to start afresh with a clean slate. It has a neat balance sheet, and can raise more funds as investor confidence is regained. The bad bank, on the other hand, has a sole focus – recovering the bad loans it has acquired at discounted rates to the maximum extent possible, for a fee.
The concept of bad banks as a recovery mechanism has many detractors. Significant points of contention include