Good Bank/New Bank vs. Bad Bank: a rare example of a no-brainer

By focusing scarce fiscal resources on supporting flows of new lending and new funding to support new lending, rather than on supporting stocks of existing bad assets and/or toxic assets and on guaranteeing or insuring stocks of existing liabilities, the state meets its three key objectives.
First, its short-run economic stabilization and crisis-fighting objective;
second, its medium and long-term banking sector incentive-enhancing, moral-hazard-minimizing objective;
and third, its fairness objectives: the polluter pays or, you break it, you own it.
Establishing legal and institutional clear water between the legacy bad banks and the new good banks is a necessary condition for fulfilling the economic imperative to support flows of new lending and borrowing rather than to protect existing stocks of toxic assets and their owners.

Maverecon: Willem Buiter