What is a bad bank?

"Bad bank" is a specially established bank holding company (often by the government) in which the 'bad loans' of one or more existing banks are collected. These problematic loans, also known as 'toxic financial products', are taken over from the banks at low rates (with significant discounts). By taking over these bad loans, the credit quality of the banks involved improves, creating room to issue new loans again.

An example of this is the National Asset Management Agency (Nama) in Ireland, which was established to free Irish banks from their uncollectible loans. Although a 'bad bank' helps to stabilize financial institutions, there is a risk that the problems will ultimately be passed on to the taxpayer, because it is in fact a state bank.

In short, a 'bad bank' can offer a solution for banks in need, but it is a complex and sometimes controversial way to restore the balance of banks.