Bad Bank Law and Legal Definition

Bad bank is a financial institution holding nonperforming assets owned by state or federal guaranteed bank. A bad bank acts as a self-liquidating trust. Usually transfer of bad loan improves the asset quality of the seller. Bad banks deal with challenges arising during an economic crisis where private banks are allowed to take problem assets off their books. In economic crisis, bad banks take over all the nonperforming loans from major banks. By separating non-performing loans, the major banks will be able to start the process of focusing on lending. For successful working, bad banks must establish a process to handle different loans. An established process has to be followed and managed with force and speed in an organization.