What is a bridge bank?
A bridge bank is an institution that has been authorized by a national regulator or a central bank to operate an insolvent bank until a buyer can be found.
A bridge bank is charged with maintaining the assets and liabilities of the bankrupt bank until the bank becomes solvent again, either through acquisition by another entity or through liquidation.
A bridge bank is usually established by a publicly supported deposit insurance organization, such as the Federal Deposit Insurance Corporation (FDIC), or a financial regulator. In the United States, the FDIC received authority to establish these temporary banks through the Competitive Equality Banking Act (CEBA) of 1987.
- A bridge bank is a temporary bank created by federal regulators to operate a bankrupt or insolvent bank.
- In the United States, a bridge bank is designated to operate the failing bank for up to three years, until a buyer is found or the bank’s assets are liquidated.
- The bridge bank’s job includes managing the distressed bank’s deposits and liabilities, such as meeting financial obligations to avoid service interruptions for retail clients and continuing to service loan commitments.
- A bridge bank is intended to be a temporary aid to an insolvent bank as it tries to find a buyer or receive a ransom.
- Bridge banks are considered critical when the collapse of the insolvent bank or banks could cause widespread financial risk to a country’s economy or markets.
How a bridge bench works
The FDIC has the authority, using a bridge bank, to operate a failed bank until a buyer can be found. Bridge banks can be used to avoid systemic financial risk to a country’s economy or credit markets and to appease creditors and depositors in an attempt to avoid negative effects such as bank runs and panics.
A bank of bridges is meant to be a temporary measure, hence the term “bridge.” A bridge bank provides the time necessary for an insolvent bank to find a buyer, so that the insolvent bank can be absorbed under a new ownership structure. In the event that an insolvent bank is unable to find a buyer or bail out, the bridge bank will administer its liquidation with the help of the appropriate bankruptcy court.
In most cases, a bridge bank will not exceed the two or three years allotted for an insolvent bank to find a buyer or liquidate. (In the US, this must occur within two years, which can be extended for an additional year for good cause.)
However, if a bridge bank is unsuccessful in its liquidation task, a national deposit insurer or national regulator may intervene as a recipient of the insolvent bank’s assets. For example, the bridge bank may be required to contact the Office of the Comptroller of the Currency of its intention to dissolve the bridge bank. In this situation, the FDIC is designated as the asset manager of the bridge bank.
Functions of a bridge bank
The primary job of a bridge bank is to provide a smooth transition from bankruptcy to ongoing operations. In the US, under CEBA, if an FDIC-insured bank is in financial trouble (facing bank failure or insolvency), the FDIC can establish a bridge bank to perform these functions:
- Take the deposits from the closed bank;
- Assume other responsibilities of the closed bank that the Corporation, at the Corporation’s discretion, deems appropriate;
- Purchase the assets of the closed bank that the Corporation, at the Corporation’s discretion, deems appropriate; Y
- Perform any other temporary function that the Corporation prescribes in accordance with this Law.
In the US, all bridge banks must be licensed as domestic banks (according to US banking law). Bridge banks are tasked with meeting all commitments to the bankrupt bank’s clients; Most notably, they fail to interrupt or terminate adequately secured loans.
Bridge banks are allowed to try to liquidate failing banks, either by finding buyers for the bank as a going concern or by liquidating its portfolio of assets, within two years, which can be extended for an additional year for reason.