As German banks are currently facing the new regulations of Basel II as well as strong global competition, non and sub performing loans have risen to a subject of high interest in German banks. The German press pays high attention to the topic and the constantly growing non performing loan market. Nevertheless, academic research in this field is limited. Therefore, this paper asks the question of the optimal management of distressed loans and reformulates it into the problem of the vertical boundaries of companies. The objective of the paper is to give a recommendation to German bank to solve their non-performing loan problem in terms of the organisational structure of the workout management. From a bankís perspective, organisational integration or disintegration of workout management of non-performing real estate loans is transferred into a make- or buy decision of the transaction cost economies. Transaction cost economics are used in order to analyse under which circumstances * ìmakeî (own work out department of a bank) or * ìbuy/sellî (external servicer, investor) options are dominant strategies for German banks in order to solve the non performing loan problem. // A formal transaction cost based model analyses which parameter decide on the optimal organisational structure of the workout management. The degree of specificity of required investments and knowledge can be identified as a key decision variable in a formal model based on the transaction cost economics.