Bad Banks and Recapitalisation

This working paper by Dorothea Schäfer and Klaus F. Zimmermann “Bad Bank(s) and Recapitalization of the Banking Sector” is interesting in the context of the NAMA debate. Paper is here.  Abstract below:


With banking sectors worldwide still suffering from the effects of the financial crisis, public discussion of plans to place toxic assets in one or more bad banks has gained steam in recent weeks. The following paper presents a plan how governments can efficiently relieve ailing banks from toxic assets by transferring these assets into a publicly sponsored work-out unit, a so-called bad bank. The key element of the plan is the valuation of troubled assets at their current market value – assets with no market would thus be valued at zero. The current shareholders will cover the losses arising from the depreciation reserve in the amount of the difference of the toxic assets’ current book value and their market value. Under the plan, the government would bear responsibility for the management and future resale of toxic assets at its own cost and recapitalize the good bank by taking an equity stake in it. In extreme cases, this would mean a takeover of the bank by the government. The risk to taxpayers from this investment would be acceptable, however, once the banks are freed from toxic assets. A clear emphasis that the government stake is temporary would also be necessary. The government would cover the bad bank’s losses, while profits would be distributed to the distressed bank’s current shareholders. The plan is viable independent of whether the government decides to have one centralized bad bank or to establish a separate bad bank for each systemically relevant banking institute. Under the terms of the plan, bad banks and nationalization are not alternatives but rather two sides of the same coin. This plan effectively addresses three key challenges. It provides for the transparent removal of toxic assets and gives the banks a fresh start. At the same time, it offers the chance to keep the cost to taxpayers low. In addition, the risk of moral hazard is curtailed. The comparison of the proposed design with the bad bank plan of the German government reveals some shortcomings of the latter plan that may threaten the achievement of these key issues.

BIS Annual Report

In recent years, the BIS annual report has been to the forefront in terms of accurate analysis of the global banking and financial system.  Its latest report is available here, while a summary is here.

Principles of Household Debt Restructuring

The IMF has a new Staff Position Note on the role of government intervention in improving the efficiency of household debt restructuring: you can read it here.

Innovation Taskforce Appointed

The Irish Times reports that

TAOISEACH BRIAN Cowen has announced the appointment of an innovation taskforce to advise the Government on its strategy for positioning Ireland as an international innovation hub and to assist in making the “smart economy” a reality.

The taskforce to assist in making the Smart Economy a reality doesn’t contain an economist of any sort, smart or otherwise.  This seems to me to be a pity.  Economists tend to think about the effect of policies on the economy in a somewhat different ways to scientists, civil servants and CEOs and could have had a useful influence on such a taskforce.  (Hey, if we’re not for ourselves, who else is going to be?)

In particular, economists tend to think about government interventions in a more systematic way (What’s the market failure that these policies are addressing? Externalities? Natural monopoly?) and to better see the linkages between new initiatives and past industrial policies.  Since there won’t be any economists advising the government on this taskforce, I would encourage participants in this blog to come forward a bit more to discuss these issues here.

One aspect of the current Smart Economy strategy for which, in my opinion, the likely economic impact is being exaggerated is the link from university innovation to start-up firms and jobs.  Policies to encourage university R&D and its commercialisation may change the type of jobs in Ireland but they are unlikely to have much effect on the number of jobs.  Similarly, the statistics on start-ups show that failure rates are very high, so as much it’s nice to talk about starting up a Nokia here in Ireland, the truth is that this process is highly random.

More generally, given the heavy emphasis in recent policy statements on university innovation and spinoffs, it is important be realistic about the role of such activity in other advanced economies.   Engineer Richard K. Lester from MIT is an international expert in the interactions between science and the economy.  Here is an interesting presentation titled “A Framework for Understanding How Higher Education Affects Regional Growth” in which he discusses some common “myths” with regard to university innovation.

Finally, here’s a link to an edition of the journal Capitalism and Society, which has a paper on the Oxford model of commercialisation as well as interesting comments from Lester. 

The papers are behind a pay firewall which many of you won’t have access to, so here’s a brief excerpt from Lester’s comments:

Lenihan on the Banks at InterTradeIreland

Thanks to Philip for posting about the video of the the InterTradeIreland event. I was interested in the video footage because Ciaran O’Hagan had, justifiably, raised a question about my post last week about the Minister for Finance’s reported comments at this event. The Irish Times article I pointed to had partially summarised the Minister’s statement and Ciaran questioned whether we could really be sure that they had gotten it right.

Well, having looked at the video, I can say that the Times story accurately reflected what the Minister said. In addition, the Minister’s comments on the banking situation were actually far more interesting than reported by the Times, so I took them down and have repeated them below (on the video these comments start at about 8.50 in).