A bridge bank is an institution created by a
national regulator or
central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central b ...
to operate a
failed bank until a buyer can be found.
While national laws vary, the bridge bank is usually established by a publicly backed
deposit insurance organisation or
financial regulator
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system. This may be handled ...
and may be instituted to avoid
systemic risk
In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to the risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the ...
and provide an orderly transition avoiding negative effects such as
bank runs.
Typically, the tasks of a bridge bank are to ensure seamless continuity of banking operations by:
* Assuming the deposits of and honouring the commitments of the failed bank, so that service to retail clients is not disrupted
* Servicing adequately secured existing loans to avoid their premature interruption or termination
* Assuming other existing assets, liabilities or functions of the defunct bank at the discretion of the regulator
These tasks are carried out on a temporary basis (usually for no more than two or three years) to provide time to find a buyer for the bank as a going concern. If the bank cannot be sold as a going concern, its portfolio of assets are liquidated in an orderly fashion. Should the bridge bank fail to wind down its operations within the allotted time, the national deposit insurance corporation is appointed as the receiver of the bridge bank's assets.
Operation by country
Nigeria
In Nigeria the (
Central Bank of Nigeria (CBN) and the
Nigeria Deposit Insurance Corporation
The Nigeria Deposit Insurance Corporation (NDIC) is a statutory body established by NDIC Act No. 16 of 2006 with exclusive mandate of administering the Deposit Insurance System (DIS) in Nigeria. As one of the components of the nation’s financial ...
(NDIC) administer the deposits and liabilities of a failed bank. Under the arrangement, the NDIC is authorized to operate a failed bank for a period until a buyer can be found for its operations.
When in the opinion of CBN, a NDIC-insured bank is in financial trouble, the CBN and NDIC may establish a bridge bank to;
* Assume the deposits of the closed bank;
* Assume such other liabilities of the closed bank as the Deposit Insurance Corporation may determine to be appropriate;
* Purchase such
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...
s of the closed bank as the Deposit Insurance Corporation may determine to be appropriate; and
* Perform any other temporary function which the Deposit Insurance Corporation may prescribe in accordance with this Act.
Bridge banks are authorized to seek to liquidate failed banks, either by finding buyers for the bank as a
going concern
A going concern is a business that is assumed will meet its financial obligations when they become due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the spec ...
, or by liquidating its portfolio of assets, within two years, which can be extended by an additional year. Should the bridge bank fail to wind down its operations within the allotted time, the bridge bank must notify the Governor of the CBN of its intent to dissolve the bridge bank. Under this situation, the NDIC is appointed as the
receiver of the bridge bank's assets.
Historic example
On August 5, 2011, Central Bank of Nigeria revoked the operating licenses of three banks including;
Afribank Afribank Nigeria PLC was a commercial banking, real estate and insurance broker based in Lagos, Nigeria. It was established by French investors in 1959 under the name ''Banque Internationale pour l'Afrique Occidentale'' (BAIO). As at 2010, the bank ...
,
Spring Bank, and
Bank PHB
Bank PHB, formerly known as Platinum Habib Bank, was a commercial bank in Nigeria. The bank was the fifth largest financial services provider in Nigeria.
The bank's assets were valued in excess of US$6 billion.
Key Officers
Francis Atuche- CEO ...
, which according to it, did not show enough capacity and ability for
recapitalization
Recapitalization is a type of corporate reorganization involving substantial change in a company's capital structure. Recapitalization may be motivated by a number of reasons. Usually, the large part of equity is replaced with debt or vice versa. ...
.
In their place, the CBN through the NDIC established Bridge Banks and transferred the assets and liabilities of the three affected banks to the Bridge Banks as follows;
#
Mainstreet Bank Limited (Afribank),
#
Keystone Bank Limited (Bank PHB), and
#
Enterprise Bank Limited
Enterprise Bank Limited (EBL), also known as Enterprise Bank, was a commercial bank in Nigeria. It was licensed as a commercial bank by the Central Bank of Nigeria, the country's banking regulator.
Overview
Enterprise Bank was a large financial ...
(Spring Bank).
Under the arrangement, MainStreet Bank Limited took over the assets and liabilities of Afribank; Keystone Bank Limited assumed the assets and liabilities of Bank PHB, while Enterprise Bank Limited took over that of Spring Bank.
The Asset Management Company of Nigeria (AMCON) immediately acquired from the Nigeria Deposit Insurance Corporation (NDIC), the three Bridge Banks. Accordingly, AMCON injected N679 billion into the Bridge Banks to meet the minimum capital base of N25 billion and the minimum
capital adequacy ratio Capital Adequacy Ratio (CAR) is also known as ''Capital to Risk (Weighted) Assets Ratio'' (CRAR), is the ratio of a bank's capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss and co ...
of 15 per cent.
United States
In the
United States law
The law of the United States comprises many levels of codified and uncodified forms of law, of which the most important is the nation's Constitution, which prescribes the foundation of the federal government of the United States, as well a ...
of
banking regulation
Bank regulation is a form of government regulation which subjects banks to certain requirements, restrictions and guidelines, designed to create market transparency between banking institutions and the individuals and corporations with whom the ...
, a bridge bank is organized by federal bank regulators to administer the
deposits
A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained below.
...
and liabilities of a
failed bank. Under the ''Competitive Equality Banking Act'' (CEBA) of 1987, the
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cr ...
(FDIC) is authorized to operate a failed bank for a period of up to three years, until a buyer can be found for its operations.
Under CEBA, when a FDIC-insured bank is in financial trouble, the FDIC "may establish a bridge bank to —
# 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."
Bridge banks must be chartered as
national bank
In banking, the term national bank carries several meanings:
* a bank owned by the state
* an ordinary private bank which operates nationally (as opposed to regionally or locally or even internationally)
* in the United States, an ordinary p ...
s in accordance with
US banking law. To the extent possible, bridge banks are required to honor the commitments of the failed bank to its customers, and not to interrupt or terminate adequately
secured loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...
s. 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
Portfolio may refer to:
Objects
* Portfolio (briefcase), a type of briefcase
Collections
* Portfolio (finance), a collection of assets held by an institution or a private individual
* Artist's portfolio, a sample of an artist's work or a c ...
of assets, within two years, which can be extended for cause by an additional year. Should the bridge bank fail to wind down its operations within the allotted time, the bridge bank must notify the
Comptroller of the Currency
The Office of the Comptroller of the Currency (OCC) is an independent bureau within the United States Department of the Treasury that was established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all nationa ...
of its intent to
dissolve the bridge bank. Under this situation, the FDIC is appointed as the
receiver of the bridge bank's assets.
[12 USC ch. 16, ss. 1821(n)(12)]
See also
*
Bad bank
*
Financial services in Japan#Financial institutions
*
Government intervention during the subprime mortgage crisis
The government interventions during the subprime mortgage crisis were a response to the 2007–2009 subprime mortgage crisis and resulted in a variety of government bailouts that were implemented to stabilize the financial system during late 200 ...
and
List of banks acquired or bankrupted during the Great Recession
*
Korea Deposit Insurance Corporation#Resolution of Failed Financial Institutions
*
List of banks acquired or bankrupted in the United States during the 2007–12 global financial crisis
*
Receivership
In law, receivership is a situation in which an institution or enterprise is held by a receiver—a person "placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights"—especially in c ...
*
Zombie bank
A zombie bank is a financial institution that has an economic net worth less than zero but continues to operate because its ability to repay its debts is shored up by implicit or explicit government credit support. The term was first used by Ed ...
References
{{Authority control
Financial regulation
Bank failures