Bad Banks: Is the concept of the German government convincing?

On 3 July 2009 the German government drafted and approved a bad-bank legislation with the goal of easing pressure on banks' balance sheets and averting an impending credit crunch. For Falko Fecht, European Business School, Oestrich-Winkel, and Hans Peter Grüner, University of Mannheim, this model is not convincing. The government's draft legislation contains considerable risks because it distorts the incentives for the banks. Also for the re-capitalisation of the banks this is not an efficient instrument. Instead the government should concentrate on solving the lemon problem in the banking sector and buy up the assets in an auction. In the opinion of Manfred Jäger, Institute of the German Economy, Cologne, the government cannot succeed completely in its goal. Although the legislation is welcome because in some cases it will help, in "unfavourable but not improbable cases" it will make no major contribution to the granting of credit since it will not result in a solution of the debt overhang problem. Also Frank Westermann, University of Osnabrück, doubts whether the design of the approved rescue package in the context of a bad bank can suffice to avert an impending credit crunch.