“Bad banks” have been widely used as a tool for coping with the aftermath of financial crises, but they are only effective when combined with recapitalisation, a new Bank for International Settlements working paper finds.

Authors Michael Brei, Leonardo Gambacorta, Marcella Lucchetta and Bruno Maria Parigi note there has been relatively little attention given to bad banks – or “asset segregation tools” – despite their widespread use. Bad banks are used to take toxic assets off bank balance