What Is a Bridge Bank?

What Is a Bridge Bank?

A bridge bank is an institution that has been authorized by a national regulator or central bank to operate an insolvent bank until a buyer can be found.

It is charged with holding the assets and liabilities of the failed bank until the bank is acquired by another entity or is liquidated.

A bridge bank is often established by a publicly backed deposit insurance organization, such as the Federal Deposit Insurance Corporation (FDIC). In the United States, the FDIC was given authority to charter these temporary banks by the Competitive Equality Banking Act (CEBA) of 1987.

How a Bridge Bank Works

The FDIC has the authority, using a bridge bank, to operate a failed bank until a buyer can be found. Bridge banks may be employed to avoid systemic financial risk to a country's economy or credit markets. They can assuage creditors and depositors and prevent negative effects, such as panics and bank runs.

A bridge bank is meant to be a temporary measure—hence, the term "bridge." A bridge bank provides the time needed to find a buyer for the insolvent bank 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, the period of use of a bridge bank will not exceed the earlier of the time allotted for an insolvent bank to find a buyer, or, to liquidate. (In the U.S., this time period is two years, but it can be extended for cause by three additional one-year periods.)

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. For example, the bridge bank may be required to contact the Office of the Comptroller of the Currency of its intent to dissolve itself. In this situation, the FDIC is appointed as the receiver of the bridge bank's assets.

Functions of a Bridge Bank

The primary job of a bridge bank is to provide for the seamless transition from bank insolvency to continued operations. In the U.S., 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:

1. Assume the deposits of the closed bank
2. Assume such other liabilities of the closed bank as the Corporation, in the Corporation's discretion, may determine to be appropriate
3. Purchase such assets of the closed bank as the Corporation, in the Corporation's discretion, may determine to be appropriate
4. Perform any other temporary function which the Corporation may prescribe in accordance with this Act

In the U.S., all bridge banks must be chartered as national banks (in accordance with U.S. banking law). Bridge banks are tasked with honoring all customer commitments of the failed bank; for example, not interrupting or terminating adequately secured loans.

Bridge banks are authorized to seek to liquidate failed banks, either by finding buyers for the bank as a going concern or by liquidating its portfolio of assets, within two years. This period can be extended.

The Bottom Line

A bridge bank is formed by a financial regulator, central bank, or, in the U.S., a federal financial insurance corporation such as the FDIC. The bridge bank operates a failed banking institution until a buyer can be found for the latter, or it's determined that it should be liquidated.

The FDIC bridge bank is a chartered national bank that continues to provide the failed bank's services to customers and to honor all contracts in existence prior to the failure.