What is a Bad Bank?

In an effort to help banks regain strength, the FDIC proposes using a bad bank plan. What is a bad bank?

Bad banks are used to take risky assets from otherwise good banks. By using bad banks, banks can improve their financial strength and stay in business.

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• What is a Bad Bank?

The main point of contention will be how much is paid for troubled assets. By paying too little, a bad bank won't help - the banks will still be insolvent. What if we pay too much? Of course, the issue of moral hazard comes up: the taxpayers get ripped off and the banks are rewarded for making big bets.

If the bad bank plan moves forward, regulators need to find the fine line between doing too little and doing too much. What do you think about a bad bank plan? Tell us about it in the comments.

Further reading:

• FDIC May Run ‘Bad Bank’ in Plan to Purge Toxic Assets
• Soros: Use Good Banks and Bad Banks
• Mortgage Crisis Causes