So this is how Germany's bad bank proposal is supposed to work:
- A bank can create a bad bank as a subsidiary
- It transfers toxic assets to the subsidiary
- The subsidiary issues a bond to its mother company
- The bond is guaranteed by Soffin (i.e. the German taxpayer)
- The bank has to pay an "adequate fee" for the guarantee
- From its dividends (if any), the bank has to make payments to the subsidiary stretched out over the next 20 years to cover any arising shortfall
- If the bank's payments are insufficient (i.e. the bank simply doesn't earn enough money to fill the hole), the taxpayer will be on the hook
What it boils down to is:
Is the "adequate fee" for the guarantee high enough to compensate the taxpayer for the risk?
As there is no objective way to determine the "adequate fee", the fee will probably end up taking into account each bank's ability to pay. Those banks with good ability to pay (i.e. comparatively low risk) will probably not make use of the facility, as they have other ways to find financing. Whereas those banks that really need the facility will be unable to pay enough.
(In any case, it seems lawmakers were worried that banks might not be able to afford the required fee, as the law explicitly allows fees to be paid by issuing new shares. Doesn't say anything about how those shares would be valued, though.)
And one thing I don't quite understand:
Why create a complicated structure (a bad-bank-SPV issuing a bond, transfer of toxic assets to SPV based on a valuation, a long-term repayment schedule from bank to SPV), if the effect is more or less the same as a direct taxpayer guarantee for the bank itself?
In addition, there's the incentive issue: A guarantee means that upside goes to shareholders, and downside is picked up by the taxpayer. Though this is probably more of a theoretical problem, as semi-government banks in the current environment probably won't dare to aggressively play the system. And anyway, problems might also arise from the opposite direction: Politicians asking "rescued" banks to do them favors, i.e. to keep troubled borrowers alive...
Previous post on this subject
Post on Verlorene Generation
Post on BlickLog
Post on EconBusinessGermany