What’s a Bad Bank and How Can It Help Deutsche Bank?

When a lender is in trouble and decides to switch strategy, the solution can be what’s commonly referred to as a “bad bank.” It’s a plan that Deutsche Bank AG is using to help it return to profit by reducing its focus on investment banking. But while the idea might sound simple, carrying out the task efficiently can be very costly.

It’s place where a financial institution that’s struggling to make money or in worse shape can put assets to sell them or wind them down. Often it’s made up of businesses or holdings that are dragging the bank down, such as risky and illiquid derivatives or delinquent loans. But the nickname can be misleading, as everything inherited isn’t necessarily bad. It can also include unwanted assets that are no longer core to a firm’s strategy. Many lenders, including Deutsche Bank, set up such divisions in-house after the 2008 financial crisis. Countries like Germany, Spain and Ireland also established taxpayer-funded vehicles to shore up the industry and keep banks lending to households and companies.