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

The ice-cream theory of bank resolution states that bank assets are just like ice-creams and the assets will be well taken care of if they are kept in the bank (just like ice creams are taken care of if they are kept in freezers). In the event of a bank failure (just like a freezer failure in case of ice creams) the assets of the bank should temporarily be put in a healthy bank otherwise the quality of the assets will deteriorate (just like an ice cream should temporarily be put in another functioning freezer). In other words the ice cream theory of bank resolution explains how assets can be prevented from deterioration just as ice creams can be prevented from melting.

In a workout of a bank that is troubled this theory is quite important and ensures that the assets of the troubled bank does not deteriorate in quality. The ice cream theory recognizes the fact that in the workout of a bank that is troubled time is of essence and just like an ice cream melts if it is not timely saved the assets of the troubled bank will also deteriorate if it is not timely saved. Thus the process has to start as soon as the problem is identified.