What Is a Bridge Bank?
A bridge bank is a bank authorized to hold the assets and liabilities of another bank, specifically an insolvent bank. A bridge bank is charged with continuing the operations of the insolvent bank until the bank becomes solvent through acquisition by another entity or through liquidation.
- A bridge bank is a temporary bank set up by federal regulators to operate a failed 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 administering the deposits and liabilities of the troubled bank, such as honoring financial obligations to avoid service interruptions for retail clients and continuing the service of loan commitments.
- A bridge bank is meant to be a temporary help for an insolvent bank as it tries to find a buyer or to receive a bailout.
- Bridge banks are seen as 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 Bank Works
Bridge bank laws vary by country, but generally, a bridge bank is established by a financial regulatory or a public deposit insurance company or organization. In the United States, the FDIC was given authority to charter these temporary banks by the Competitive Equality Banking Act of 1987.
The FDIC has the authority, using a bridge bank, to operate a failed bank for up to three years until a buyer can be found. Bridge banks may be employed to avoid systemic financial risk to a country's economy or credit markets and to assuage creditors and depositors in an attempt to avoid negative effects such as panics and bank runs.
Bridge Bank Tasks
The primary job of a bridge bank is to provide for the seamless transition from a bank insolvency to continued operations. As such, a bridge bank may perform the following tasks:
- Picking up and administering the deposits of a failed bank, as well as honoring the failed bank's financial commitments, with the goal of ensuring that service to retail clients (depositors, borrowers) is not interrupted
- Assuming and continuing the service of outstanding loan commitments so that they are not ended or otherwise disrupted
- Administering all other assets and liabilities, as well as operations of the insolvent bank according to the instructions and wishes of the overseeing banking regulator
Bridge Bank Timing
A bridge bank is meant to be a temporary measure—hence, the "bridge" descriptor. A bridge bank provides the time needed for an insolvent bank to find a buyer so that the insolvent bank can be absorbed under a new ownership structure. In the case that an insolvent bank is unable to find a buyer or effect a bailout, 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 to liquidate. However, if a bridge bank proves unsuccessful in its winding-down task, a national regulatory or national deposit insurer may step in as the receiver of the insolvent bank's assets.