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.
A bridge bank is charged with holding the assets and liabilities of the failed 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 backed deposit insurance organization, such as the Federal Deposit Insurance Corporation (FDIC), or a financial regulator. In the United States, the FDIC was given authority to charter these temporary banks by the Competitive Equality Banking Act (CEBA) of 1987.
- 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
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 and to assuage creditors and depositors in an attempt to avoid 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 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. (In the U.S., this must occur within two years, which can be extended for cause by an additional year.)
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. For example, the bridge bank may be required to contact the Office of the Comptroller of the Currency of its intent to dissolve the bridge bank. 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:
- Assume the deposits of the closed bank;
- Assume such other liabilities of the closed bank as the Corporation, in the Corporation's discretion, may determine to be appropriate;
- Purchase such assets of the closed bank as the Corporation, in the Corporation's discretion, may determine to be appropriate; and
- 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; most notably, 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, which can be extended for cause by an additional year.