Dexia Proposes So-Called Bad Bank: Report

Franco-Belgian lender Dexia is reported to be preparing to set assets worth more than $238.9 billion (EUR180 billion) into a so-called bad bank, a vehicle backed by guarantees from the French and Belgian governments, according to a report in The Wall Street Journal that cited unnamed people familiar with the matter.

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Dexia is taking the step in an effort to disentangle itself from gripping liquidity strains, these people said in the report.

The bad-bank plan would be part of a broader move under which Dexia would sell all of its core units, which may effectively dismantle the lender.

The paper reported the bank would ring fence into a special vehicle all the assets it inherited from an aggressive expansion push early in the past decade as well as units that can't be sold under current market conditions.

These assets would include a portfolio of bonds worth EUR95 billion and about EUR30 billion in loans deemed non-strategic, they said. Dexia Crediop and Dexia Sabadell, the bank's municipal lending units in Italy and Spain, respectively, would also be folded into the bad bank, the people familiar with the matter said.

Markets have been focused on Dexia as its shares dropped sharply amid speculation that its situation could be the start of a new financial crisis.

The Dexia situation exposed the types of troubles that could be in store if Greece defaults.

Shares in Dexia, which has exposure to Greece, fell more than 20 percent on Tuesday suggesting an expansion of the European Central Bank's liquidity facilities would do little to ease interbank stress.