These entities are created by governments by using public and private funds. bad banks are set up to be able to acquire real-estate, overdue credit and defaulted loans that have caused their holders (usually banks or other financial institutions) to have problems so they are able to take these toxic assets off their balance sheets. In Spain, the bad bank (known as sareb) has a timeframe of 15 years to sell those types of assets and get back some of the money. The types of assets that can be transferred to the bad bank must possess certain characteristics, such as:
- Real-estate that’s been acquired from not servicing a debt (ex. a mortgage)
- The value (real-estate) must be greater than 100,000 euros
- For credit, including late or overdue payments and those that are up-to-date, the value must be greater than 250,000 euros.
The bad bank can buy assets at their book value, in which discounts are already included (80% for land, 65% for items already on sale and 35% for finished housing, for example). The bad bank can then issue capital as well as subordinate debt to private investors. The Fund for Orderly bank Restructuring would finance 10% of the bad banks assets. The other 90% would be issued as senior debt and would be guaranteed by the government. However, this type of debt would not count towards public debt since 51% of the capital is in the hands of private investors.