Bridge Bank

Bridge Bank - is an institution that was created by a national regulatory authority or central bank to operate a bankrupt bank until a buyer is found for its business. Bridge bank manages an insolvent bank as a caretaker.

Goal of Bridge Bank

The Bridge bank is created to receive and store deposits and good assets of another system bank. The bridge bank is responsible for continuing the operation of the insolvent bank, may obtain permission to conduct some or all of the bank's regular operations, such as granting new loans and renewing existing loans. The bridge bank is a temporary measure, hence the 'bridge'. The bridge bank provides the time needed for an insolvent bank to find a buyer so that it can become a business again. But if the insolvent bank is unable to find a buyer, the bridge bank manages its liquidation with the help of a competent bankruptcy court.

Conditions

A national bank may be chartered by a currency controller as a bridge bank only if the management board finds that:

• the amount that is reasonably necessary for the operation of such a bridging bank will not exceed the amount that is reasonably necessary to save the costs of liquidation, including payment of the accounts of the insured 1 or more insured banks affected by default or which threaten to default on which is chartered over a bridge
• the continuation of the business of such insured bank or banks that are subject to default or which are at risk of default, is essential to provide appropriate banking services in the community in which each bank in default is located
• the continued operation of such insured bank or banks in which the bank or bankruptcy is at risk, for which a bridging bank is chartered, is in the best interest of the depositors of such bank or banks in bankruptcy or in bankruptcy or in society

Rule of Bridge bank

After chartering the bridge bank, the bridge bank may:

• accepting deposits from such insured bank or banks that are unable to perform or are at risk of default
• accepts such other obligations (including obligations related to any fiduciary activity)
• purchase of such assets (including assets related to any fiduciary activity)
• perform any other temporary functions that the corporation may order in its sole discretion

The articles of association of the bridge bank organization are approved by the corporation and drawn up by 3 representatives appointed by the corporation. The bridge bank has a temporary board of directors, which consists of not less than 5 and not more than 10 members appointed by the corporation. The bridge bank management adopts regulations that may be approved by the corporation. The bridge bank is an insured bank since the charter as a national bank. The bridge bank will be treated as an insured bank which is affected by the default at such times and for such purposes as the corporation may determine at its sole discretion. A bridge bank may be treated as a bantruckto for some purposes.

Duration of the bridge bank

The bridge bank status expires at the end of 2 years from the date of the card being issued. The management board may, at its own discretion, extend the status of a bridging bank as such by three additional 1-year periods.

Completing the bridge bank

The status of each bridge bank expires at the earliest:

• merger or consolidation of a bridge bank with a depository institution which is not a bridge bank
• when choosing a corporation, the sale of the majority of the bridge bank's share capital to an entity other then the corporation and other than another bridge bank.
• sale of at least 80 percent of the core capital of the bridge bank to an entity other than a corporation and other than another bridge bank
• when choosing a corporation or taking overall, essentially, the bridging bank's deposits and other liabilities by the institution's holding company, depositary or depository institution that is not a bridge bank, or the acquisition of all or substantially all of the assets of the bridge bank by the holding company of a depository institution, a depository institution other than a bridge bank or other entity authorized under applicable law
• expiry date of the bridging bank

Bridge bank solution

The Board of Directors may, at its sole discretion, dissolve a bridge bank in accordance with this paragraph at any time. The management board shall immediately commence proceedings for the termination in accordance with this paragraph after 2 years from the date of chartering the bridge bank or its extension.

Charter conversion

After selling the majority of the bridge bank's core capital, the corporation may amend the bridge bank statute to reflect the termination of the status of bridge bank as such, after which the bank remains a national bank, with all its rights, privileges and privileges, subject to all applicable laws and regulations.

Examples of Bridge Bank

• Bridge Bank Group: Bridge Bank Group is a leading corporate and specialty banking company that provides financial solutions to small and mid-sized businesses in the United States. It is headquartered in San Jose, California, and offers a range of banking services including commercial and industrial loans, equipment finance, and venture capital.
• Bridge Bank of India: Bridge Bank of India is an Indian government-owned bank and was formed in 2008 by the merger of two state-run banks—State Bank of India and Bank of Baroda. It provides a range of banking services including deposits, current accounts, savings accounts, loans, credit cards and foreign exchange services.
• Bridge Bank of Canada: Bridge Bank of Canada is a Canadian bank that provides a range of financial services to small and medium-sized businesses in the country. It offers deposit accounts, business loans, and merchant services. The bank has its headquarters in Toronto, Ontario.

Advantages of Bridge Bank

Bridge banks can be useful tools in the event of a bank insolvency. They provide a quick and efficient way to stabilize the banking sector and protect customer deposits. Here are some advantages of bridge banks:

• Bridge banks provide continuity in the banking sector by preserving customer deposits, assets, and services while a long-term solution is sought.
• Bridge banks can help minimize disruption to customers who are affected by the bankruptcy of a bank.
• Bridge banks can help protect the economy from the negative effects of bank insolvency, such as a decrease in economic activity and a decrease in public confidence in the banking system.
• Bridge banks can help to preserve jobs by maintaining a bank’s employees and operations until a buyer is found.
• Bridge banks can help to reduce the costs associated with bank insolvency by providing a quick and efficient solution.

Limitations of Bridge Bank

A bridge bank is an institution created by a national regulatory authority or central bank to take over the operations of a failed bank until a buyer is found. While this provides an invaluable service to the banking industry, there are several limitations to using a bridge bank. These include:

• Limited purpose: Bridge banks are limited to the purpose of managing the insolvent bank, and are not allowed to offer other services such as lending or investments.
• Time constraints: Bridge banks are usually limited to a certain period of time, after which the bank must be sold or liquidated.
• Costly: Bridge banks are expensive to operate and may require special funding from the regulatory authority to cover costs.
• Regulatory uncertainty: Because bridge banks are usually not permanent, there may be uncertainty about the regulatory environment in which the bank will operate.
• Limited customer base: Bridge banks often have a limited customer base, as customers may be hesitant to use a bank with an uncertain future.

Other approaches related to Bridge Bank

Bridge Bank is an institution established by a national regulatory authority or central bank to manage a bankrupt bank until a buyer can be found. Other approaches to managing an insolvent bank include:

• Liquidation - The process of closing a business and distributing its assets to its creditors.
• Receivership - A trustee appointed by a court or creditor seizes the assets of the insolvent bank and liquidates them in order to repay creditors.
• Debt restructuring - A process that involves restructuring the terms of the debt such as the interest rates, maturity date and principal amount in order to reduce the burden on the insolvent bank.
• Merger/Acquisition - Merging the insolvent bank with a healthier one, or having it acquired by another bank.

In summary, Bridge Bank is an institution set up by a central bank or regulatory authority to take over the operations of a bankrupt bank until a buyer is found, as well as other approaches such as liquidation, receivership, debt restructuring and merger/acquisition.

Bridge Bank — recommended articles

Creation of money — Nominee shareholder — Credit sweep — Capital Base — Bankers Bank — Funding Operations — Debenture Redemption Reserve — External sources of finance — Sovereign guarantee

References

• Asser T.M.C., International Monetary Fund Staff, (2001) Legal Aspects of Regulatory Treatment of Banks in Distress, International Monetary Fund
• International Monetary Fund, (2012), Australia: Financial Safety Net and Crisis Management Framework—Technical Note,International Monetary Fund
• United States, (1992), United States Code: Title 12, Banks and banking, to Title 22, Foreign relations and intercourse, U.S. Government Printing Office
• Zisman B., (2019), Banks and Thrifts: Government Enforcement and Receivership, LexisNexis

Footnotes

Author: Klaudia Kazienko