The rest of the paper is organized as follows. Section 2 evaluates the situation of German banks in terms of capitalization. In section 3, bad bank solutions of the past are studied and prerequisites for success are examined. Section 4 develops a classification scheme for existing and planned bad bank solutions. We develop in Section 5 the efficient design for a public bad bank. Section 6 evaluates the German Government’s bad bank proposal. Section 7 concludes. Two simple numeric examples illustrate the working of both bad bank plans in the Appendices. .
