The UK government is considering implementing a “bad bank” to manage the expected rise in toxic debt due to the Covid-19 pandemic. A bad bank is a financial institution that buys and holds bad loans from other banks, allowing these banks to clear their balance sheets. The Financial Times reports that the government is exploring this option as part of its response to the economic fallout from the pandemic. The creation of a bad bank could help manage the expected surge in bad loans, which are predicted to reach £36bn. The Bank of England has warned that the economic shock caused by the pandemic could push the country into its deepest recession in 300 years. The UK last created a bad bank in response to the 2008 financial crisis. The bad bank, named UK Asset Resolution, still holds £14bn of assets from failed banks Northern Rock and Bradford & Bingley.
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