ZEW Survey among Financial Market Experts - Sympathy for "Bad Bank light"

Direct investments in financial institutions by the Federal State and the establishment of a "bad bank light" is the most suitable way of reorganising German banks which were financially damaged by the economic crisis. In contrast, the full nationalisation of banks and the establishment of a "bad bank" would not provide an appropriate basis for recovering the stability of the financial market. This reflects the expectations of the majority of the 274 financial market experts surveyed by the Centre for European Economic Research (ZEW).

Currently there is an ongoing debate about different methods of clearing "toxic" assets off the banks’ balance sheets. One possibility is the establishment of a central "bad bank" or several "bad banks". These are institutions, such as a safeguard funds for instance, set up to buy off the banks’ bad assets. However, this solution involves a number of problems. It is, for instance, difficult do decide which assets in a bank can be declared "bad". Furthermore it is not clear how to define and value those "bad" assets and how it can be avoided that the government pays too much for them. For this reason 51 percent of the financial market experts involved reject the model of a central "bad bank", 33 percent support the concept and 16 percent are undetermined.

The problems involved in the establishment of a "bad bank" can be partially solved via the concept of a "bad bank light". In this model, the government takes over the bad assets in exchange for an equalisation claim at the value of those assets at the balance sheet date. In contrast to a classic bad bank, the government does not have to provide liquidity at an instance. A loss in value is only paid for when the assets are due. In return, the government annually receives a share of the banks’ profits for several decades. This model would instantly relieve banks, but it would also engage them in paying off their bad assets. In view of those arguments the percentage of financial market experts supporting a "bad bank light" rises to 46 percent. Only 20 percent reject such a model. However, 34 percent of the experts are undetermined.

A majority of 64 percent of the analysts clearly reject the full nationalisation of banks. Only 20 percent expect this solution contribute to the stabilisation of financial markets, 16 percent are undetermined.

Despite the debated supporting measures the banking crisis is not about to abate. More than half of the experts expect the crisis to continue for another 18 to 24 months.

For further information please contact

Matthias Köhler, E-Mail: koehler@zew.de