A distressed bank can transfer structured securities and other risk bearing positions, for example impaired loans, and complete business segments that are not essential for the bank's future strategy into a wind-down agency, so called bad bank. Thus the distressed bank gets the opportunity to wind down these risk bearing portfolios in an orderly manner and to refocus and realign with a promising business model. Through the transfer of the risky positions the bank gets released from capital requirements as well as from pressure to write downs caused by fluctuations in values. Nevertheless the owners of the bank remain in charge of the wind-down agency financially. The owners of the bank still have to make up for financial losses arising from the wind-down agency.
The Federal Agency for Financial Market Stabilisation (FMSA) created two wind-down agencies: The Erste Abwicklungsanstalt (EAA) and the FMS Wertmanagement (FMS-WM). Both wind-down agencies are legally extendedly supervised by the FMSA. Thereby the conditions of the duty to offset losses by the FMSA are determined by the charter of each wind-down agency respectively. Upon completion of the liquidation, viz. after the sale of all the transferred risk positions and business segments, the FMSA will dissolve the wind-down agencies.
Erste Abwicklungsanstalt (EAA)
The EAA was established on 11 December 2009 under the aegis of the FMSA. Business segments, assets and obligations from the former WestLB that were dispensable for the strategy have been transferred into the EAA.
FMS Wertmanagement (FMS-WM)
The FMS-WM was established on 8 July 2010 by the FMSA. The FMS-WM took over all the risk positions and non-strategic operations of Hypo Real Estate Holding (HRE).