Its is a basic principal, but it seems like many have forgotten it: bad managers have to face the consequences of their actions. On occasions this implies giving up proprietary resources and leaving them in the hands of others who know how to manage them more effectively. Or simply liquidate the business. This is how the markets operate. Within financial reforms, some lenders are provisioning for toxic assets that exist on their balance sheets. The banks that are well-managed or have more financial brawn have already met their obligations and raised provisions as security against the majority of their real estate assets.
Some lenders are struggling more. That is to say, they need aid from outside sources. And they will have until the end of 2013 to seek this aid and clean up their balance sheets. Nobody wants to lose credibility and publicize balance sheets problems, but the difference between those who can finance their own cleanup at the expense of lost profits and those who would not profit at all should they choose to clean up has started to divide the banking sector.
The Spanish government seems ready to create a bad bank (although it does not want to call it by that name) once the bank merger process finalizes within several weeks. Healthy banks have spoken against the idea. Why? Because they have already strengthened their positions and would receive no benefit from a tool like the "bad bank."
What is more, healthy banks question the fairness of giving public aid to banks with serious problems. Digesting the ?bad bank? will be a heavy burden for the State, but it would be worse not to do it and further delay cleaning up the financial sector. Perhaps all medicines have their side effects.
