Bad Banks: The Case of Germany

Cordelius Ilgmann () and Ulrich van Suntum

No 200110, Working Papers from Institute of Spatial and Housing Economics, Munster Universitary

Abstract: This paper discusses the instrument of equalisation claims, which has successfully been used in two previous German debt crises as a method for stabilizing the balance sheets of financial institutions. A modern version of this method would swap temporarily illiquid assets for government bonds with open maturit, in order to avoid the problem of evaluating the toxic assets in advance. Not only will this method save taxpayers' money, but it also upholds the market principle of liability, thereby avoiding incentives for inefficient risk-prone behaviour in the financial sector. The current German bad bank approach principally follows this approach, but severely suffers from unnecessary complexity and voluntary participation.

Keywords: Financial Crisis; Bad Banks; German History; equalisation claims (search for similar items in EconPapers)
JEL-codes: E44 G01 N24 (search for similar items in EconPapers)
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Citations: View citations in EconPapers (2)

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