Question

Explain the ice-cream theory of bank resolution and how it is important in the workout of a bank that is troubled.

Answer 1

Ice-cream theory of bank resolution- Under this theory, bank assets are treated with ice-cream, and banks are treated as freezers.

According to this theory, "Ice cream (bank assets) does not melt if the freezer (bank) properly works, but if the freezer (bad bank) is unable to function, it is started melting. So, now the ice-cream (bank assets) should be immediately shifted in a functioning freezer (good bank) or else it will invariably melt (assets values will be reduced)." Here the basis of good bank and bad bank is efficiency criteria of handling bank assets.

Ice-cream theory of a bank resolution process is very important in the workout of a bank that is troubled, because-

1. It gives an idea to decision makers to transfer, special nature of bank assets that can deteriorate rapidly, to another banks/institution in a short period of time to avoid significant deterioration.

2. This theory explains that, the lack of timely transfer of assets to proper administrators is one of the main sources of losses in resolution processes. So proper decisions can be taken by decision makers before subsequent losses.