The amount of capitalization required by a bad bank is essentially determined by two factors: operating costs and acquisition costs. When a low price is paid for the acquired troubled assets, this not only minimizes the risk of future losses but also keeps the initial capital requirements of the bad bank low. The source of financing determines whether the government or private sector provides the required start-up funding. The need for liquid funds depends on how the banks being freed of their troubled assets will be “paid.” Liquid funding is not immediately required if a “payment” is made.
