What not to do with a "bad bank"

"Individual bad banks are a better solution than a single bad bank because they are more manageable and faster to get moving," Jan Eric Kvarnstroem told Reuters in an interview.

Kvarnstroem, a Swedish banker whose European Resolution Capital was set up to advise on bad bank projects, headed the Dresdner Bank unit that restructured bad loans earlier this decade and was a pivotal player in Sweden's much-vaunted banking rescue in the 1990s.

He said a key consideration in setting up a bad bank was for leaders to have a clear view on the strategy of the healthy bank and allow its employees to focus on doing business.

"You have to design the surviving bank so that it is fit for the future," said Kvarnstroem, adding those who set up toxic assets are in the best position to help get rid of them.

His view echoes that of Martin Blessing, chief executive of Commerzbank which now owns Dresdner.

German Chancellor Angela Merkel has also said she opposes setting up a central bad bank to warehouse toxic assets that would leave taxpayers to foot the bill.

But the state will be forced to take a lead role in sorting out the crisis and restoring confidence in the banking system. The EU is working on a common approach.

Banks struggling to slog their way clear of the toxic on their balance sheets need a clear sense of what to take with them and what to leave behind, and face years of work before the complex derivative and structured finance products at the heart of the current crisis can be laid to rest, Kvarnstroem said.

Bankers and governments must not lose sight of a few basic management principles in deciding how to deal with bad assets, which have already prompted more than $700 billion (469.7 billion pounds) in writedowns in the United States and Europe alone.