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Bad bank solution for Hypo Alpe Adria

Austria's national bank governor (OeNB) Ewald Nowotny has come out in favour of a "Bad Bank" model to solve the problems of the Hypo Alpe Adria (HGAA) bank.

The bank in Carinthia was at the centre of a scandal after it was revealed that it had been involved in a number of questionable activities including making bad loans using asset-backed securities particularly in Eastern Europe. But it had also been closely connected to the then regional governor Jorg Haider who had allegedly encourage the bank to make bad business decisions in order to support him politically.

Bad bank is a term for a financial institution created to hold non-performing assets owned by a state guaranteed bank. Such institutions have been created to address challenges arising during an economic credit crunch where private banks are allowed to take problem assets off their books.

In the case of Hypo Alpe Adria it is alleged that the bank's financial situation had been disguised in order to sell it  May 2007 to the German BayernLB bank. But after pumping in hundreds of millions in order to stabilise the bank the Germans were forced to sell it back to the Austrian government to prevent a bank collapse.

The financial crisis of 2007–2010 resulted in bad banks being set up to handle the crisis in a variety of countries. For example, a bad bank was suggested as part of the Emergency Economic Stabilization Act of 2008 to help address the subprime mortgage crisis in the US. In Ireland, a bad bank, the National Asset Management Agency was established in 2009, in response to the financial crisis in that country. In 2010 the UK government established UK Asset Resolution, a state owned limited company to manage the assets of the two bankrupt nationalised mortgage lenders Bradford & Bingley and Northern Rock (Asset Management). This Bad Bank is responsible for managing £77bn of assets.

Since buying back the bank the Austrian government has been looking for a solution to get the problem of their books and according to Nowotny he believes that the bad bank idea would be the best option.

He said: "with the idea of using a bad bank model there are a number of possibilities available, it simply a question of seeing which one suits this situation best. At the end of the day though the government has to decide what the best way forward is."

No amount was given on how much money would be lodged with the bad bank but it was revealed last week that the Hypo Alpe Adria in order to balance its books needed more state money.

This year alone is likely to be €2 billion to cover further losses in bad credits made in the Balkans.

The biggest problem at the moment is that officials in Vienna and in Klagenfurt have fixed up a timetable that would involve selling the Balkans bank in the middle of 2015 – which officials in Brussels already said it is far too long.

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