[1] A bank may accumulate a large portfolio of debts or other financial instruments which unexpectedly become at risk of partial or full default.
A large volume of non-performing assets usually make it difficult for the bank to raise capital, for example through sales of bonds.
For example, a bad bank was suggested as part of the Emergency Economic Stabilization Act of 2008 to help address the subprime mortgage crisis in the US.
In the Republic of Ireland, a bad bank, the National Asset Management Agency was established in 2009, in response to the financial crisis in that country.
After the Grant Street National Bank had fulfilled its purpose, issuing preferred shares and equity purchase contracts to finance the purchase of $1 billion in Mellon's bad loans at 57% of face value, then collecting what it could on the individual loans, it was liquidated and its employees quietly returned to Mellon Bank.
Grant Street's early investors made handsome profits; the bank was dissolved in 1995 after repaying all bondholders and meeting its objectives.
[7] The Swedish authorities engaged McKinsey & Company to help design a solution, and chose to establish two bad banks, Retriva and Securum.
Lars Thunell was appointed to lead Securum, supported by Anders Nyrén and Jan Kvarnström to manage its toxic book, at the time valued at sek 51 billion.
Sponda was privatized and listed in Helsinki Stock Exchange in 1998, and in 2012, all government-held shares were sold by their holder, the government's asset management company Solidium.
In early 2009, Citigroup dumped more than $700 billion worth of impaired assets into bad bank Citi Holdings.
[15] Parliament has to enact a legislation establishing the Bad Bank – by whatever name called – NAMA, PARA, or NAMC.
The Government shall retain minority stake in the Bad Bank and invite the private investors to hold the majority.
Valuation of the NPAs should be done by professional agencies and transfer price should not be more than long term economic value of the bad asset.
Latvia's government took a controlling interest in Parex in November 2008, spinning off Citadele banka as a good bank in August 2010.
The Baltic Crisis was partly initiated by the global credit crunch, but it revealed questionable lending practices of all major Swedish banks.
With the support of the Swedish authorities the new CEO of Swedbank, Michael Wolf, engaged bad bank specialist Kvanrnstrom, European Resolution Capital and Justin Jenk who lead the formation and management of Swedbank’s bad banking operations (Financial Resolution & Recovery and Ektornet).
This body of work has been referenced by governments and authorities around the world as best practice and some of its lessons applied (most recently in Ireland, Spain, Cyprus and Slovenia).
Instead of developing a company that is temporarily unable to pay, the bondholder is given an incentive to sue for bankruptcy immediately, which makes it eligible for sale to a bad bank.