A way to regain investor's trust: the bad bank

Despite the coordinated efforts of the governements and the central banks aiming to recapitalize private financial institutions, the global financial crisis hasn't been fully absorbed, so far, expecially in USa and UK where it started. Even if the quarterly earning annouced by Goldman Sachs have had a positive impact on investors, the disappointment for the very bad performance of global banks in the last few months is still nourished by the losses of Citigroup and the Swiss UBS.
At this stage, it is crucial to regain the trust of investors, who are intelligibly circumspect when facing the risky assets held by the banks: if the level of this risk cannot be calculated, then there's no space for sensible investments. That's why governements and central banks were forced to recapitalize private banks in order to decrease their financial leverage.
One possibile solution to this problem might be the "bad bank", which would allow the separation of the different assest: the bad bank, capitalized with public money and private investments, would take all the riscky assets, freeing the solid ones from their deadly influence. Separating these different assets would increase investments, because investors inclined to risky investments might take the opportunity to ask for higher returns, whereas the others would be able to invest in the cleaned-up bank with lower risks and returns.
The implementation of the bad bank solution is not free from problems, because there are technical issues not easy to solve, such as the quotation of risky assets, but it is surely a tool that must be take into consideration, because the benefits it might bring in the actual scenery are more than remarkable.

More info: VirtualBocconi

Alessia Cecchini