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Bridge bank

A bridge bank is a temporary financial institution chartered and operated under the supervision of banking regulators to acquire the assets, deposits, and operations of a failed depository institution, thereby maintaining continuity of services for customers and counterparties while the regulator seeks a permanent resolution, such as a sale to another entity.^[1]^[2] In the United States, the Federal Deposit Insurance Corporation (FDIC) establishes bridge banks pursuant to its resolution authority under the Federal Deposit Insurance Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, chartering them through the Office of the Comptroller of the Currency to bridge the gap between failure and stabilization without immediate liquidation.^[3]^[4] Bridge banks have proven instrumental in mitigating systemic risks during bank failures by enabling the seamless transfer of insured and uninsured deposits, loans, and other operations, as demonstrated in high-profile cases such as the 2023 resolutions of Silicon Valley Bank and Signature Bank, where the FDIC transferred over $200 billion in combined assets to newly formed bridge banks to avert broader market disruption.^[5]^[6] This mechanism avoids taxpayer-funded bailouts by drawing on the FDIC's Deposit Insurance Fund and prioritizes depositor protection over shareholder interests, aligning with least-cost resolution mandates.^[7] Earlier applications, including the 2008 IndyMac Bank failure, underscored the tool's effectiveness in orderly wind-downs, allowing regulators to market viable franchises while isolating problematic assets.^[8] Defining characteristics include limited duration—typically weeks to months—strict operational constraints to prevent value erosion, and the FDIC's unilateral authority to repudiate burdensome contracts, ensuring causal focus on financial stability over legacy obligations.^[9]^[10]

Definition and Purpose

Core Definition

A bridge bank is a temporary financial institution chartered by a national regulator to acquire and operate the assets and liabilities of a failed or failing bank, thereby maintaining continuity of critical banking functions such as deposit access, payments processing, and lending until a permanent resolution—typically a sale to a private buyer—can be arranged.^[1]^[7] This approach serves as a resolution tool to mitigate immediate disruptions to the financial system, particularly for institutions whose collapse could pose systemic risks due to their size, complexity, or interconnectedness.^[11]^[2] In the United States, the Federal Deposit Insurance Corporation (FDIC) establishes a bridge bank upon its appointment as receiver for a failed insured depository institution, transferring viable assets and all deposits (both insured and uninsured, in certain cases) to the new entity, which operates under a temporary charter as a full-service national bank supervised by the FDIC and the Office of the Comptroller of the Currency.^[11]^[12] The FDIC, acting as the bridge bank's board of directors, manages day-to-day operations to preserve franchise value and customer relationships, often providing temporary funding through advances if needed, while isolating and liquidating non-viable assets separately.^[13] This structure, authorized under the Federal Deposit Insurance Act as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, enables orderly wind-down without taxpayer-funded bailouts by leveraging the FDIC's deposit insurance fund for any losses.^[2]^[12] The bridge bank's limited lifespan—typically up to two years, extendable under exceptional circumstances—emphasizes its role as a stabilization mechanism rather than a permanent entity, allowing regulators to market the institution or its components without the urgency of a fire-sale auction.^[7] By contrast with outright liquidation, which might erode asset values and trigger contagion, the bridge bank preserves operational infrastructure and mitigates moral hazard by enforcing losses on shareholders and unsecured creditors first.^[14] This tool has proven effective in high-profile failures, such as those of Silicon Valley Bank and Signature Bank on March 10 and 12, 2023, respectively, where bridge banks facilitated uninterrupted service to over $300 billion in combined deposits.^[11]^[15]

Primary Objectives

The primary objectives of a bridge bank are to ensure the uninterrupted provision of critical banking services, thereby preventing immediate disruptions to customers and the broader financial system. By transferring viable assets and liabilities from a failed institution, the bridge bank maintains operations such as deposit access, payment processing, and lending continuity, which minimizes panic among depositors and counterparties. This approach allows regulators to stabilize the institution temporarily without resorting to immediate liquidation, which could exacerbate market instability.^[11]^[16] A key goal is to protect depositors, particularly insured ones, while facilitating the protection of uninsured deposits in cases invoking systemic risk exceptions, as seen in the 2023 resolutions of Silicon Valley Bank and Signature Bank. The structure enables full payout or transfer of deposits, averting runs and preserving confidence in the banking sector. Regulators aim to achieve this without direct taxpayer funding by prioritizing private-sector solutions, such as sales to healthy institutions, during the bridge period, which is typically limited to two years under frameworks like the U.S. Federal Deposit Insurance Act.^[11]^[2] Additionally, bridge banks seek to mitigate systemic risk by containing contagion effects from a single failure, allowing time for orderly asset disposition or mergers without fire-sale losses that could impair other banks. This resolution tool supports financial stability by operating under a temporary charter with regulatory oversight, focusing on value preservation rather than long-term viability. Empirical evidence from implementations, such as the FDIC's handling of over 500 bank failures since 2000, demonstrates that bridge banks reduce resolution costs compared to outright liquidations by enabling competitive bidding processes.^[17]^[7]

Historical Development

Origins and Early Use in the United States

The authority for the Federal Deposit Insurance Corporation (FDIC) to establish bridge banks originated with the Competitive Equality Banking Act (CEBA) of 1987, which granted the agency the power to charter temporary national banks as a resolution tool for failed insured depository institutions.^[2] This provision addressed limitations in prior resolution methods during the escalating banking crisis of the 1980s, characterized by over 1,000 bank failures between 1980 and 1994, many concentrated in regions like Texas amid economic downturns such as the oil price collapse.^[12] Bridge banks enabled the FDIC to transfer viable assets and liabilities from a failed institution to a newly chartered entity, maintaining continuous operations for depositors and counterparties while the receiver marketed the remaining assets or sought a permanent acquirer, thereby minimizing systemic disruption and potential losses to the Deposit Insurance Fund.^[13] Early implementations occurred amid the acute phase of Texas bank failures in 1988 and 1989, where traditional purchase-and-assumption transactions proved insufficient for large, complex institutions with intertwined operations. One of the initial bridge banks, NCNB Texas National Bank, was organized by the FDIC on July 29, 1988, to assume assets and liabilities from 40 failed Texas bank subsidiaries of First Republic Bancorporation, preserving service continuity for millions of customers across a vast regional network.^[18] This structure allowed temporary management under FDIC oversight, with the bridge bank eventually transferred to NCNB Corporation (now part of Bank of America) in a structured sale that recovered significant value for the resolution. Similarly, Texas American Bridge Bank was established in early 1989 following the failure of Texas American Bancshares subsidiaries, with total assets of approximately $2.5 billion transferred to facilitate orderly wind-down and marketing; it was sold to Banc One Corporation on June 28, 1989.^[19]^[20] These early uses demonstrated the bridge bank's utility for handling "too-big-to-fail" scenarios without immediate liquidation, though application remained rare due to operational complexities and regulatory hurdles under CEBA, which initially required a bank to be declared closed before bridge bank formation. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 expanded this authority, permitting preemptive bridge bank creation for failing institutions and integrating loss-sharing mechanisms to enhance cost recovery.^[21] By the end of the decade, bridge banks had resolved some of the largest failures, such as those involving multibillion-dollar portfolios, contributing to stabilization efforts that ultimately contained the crisis's fiscal impact on the insurance fund, estimated at over $100 billion in total resolutions.^[12] Overall, the tool's deployment in the late 1980s validated its role in causal resolution strategies prioritizing operational continuity over hasty asset fire sales, influencing subsequent FDIC practices.

Global Adoption Post-Financial Crises

Following the 2007-2008 global financial crisis, which exposed vulnerabilities in national resolution frameworks and led to widespread bailouts, international bodies such as the Financial Stability Board (FSB) promoted the adoption of bridge bank mechanisms as part of effective resolution regimes to minimize systemic risk and protect taxpayers. The FSB's Key Attributes of Effective Resolution Regimes, finalized in 2011, explicitly endorsed bridge institutions as a tool for transferring viable assets and operations from failing banks, influencing reforms in over 25 jurisdictions by emphasizing continuity of critical functions without full government intervention.^[22] In the European Union, the Bank Recovery and Resolution Directive (BRRD, Directive 2014/59/EU), adopted on 15 May 2014 and transposed into national laws by 2015, institutionalized the bridge institution tool across member states as one of six resolution powers. Article 41 of the BRRD authorizes resolution authorities to establish or designate a bridge institution—a fully or partially publicly owned entity meeting capital, liquidity, and governance standards—to receive transferred assets, liabilities, and critical operations from a failing institution, with a typical operational period of up to two years extendable to one year, aimed at stabilizing and eventually selling the entity as a going concern. This framework, integrated into the Single Resolution Mechanism for eurozone banks since 2015, marked a shift from ad hoc national responses during the crisis to harmonized tools, though actual deployments have been rare due to preferences for bail-in or sale-of-business options.^[23]^[24] The United Kingdom implemented bridge bank powers through the Banking Act 2009, effective from February 2009, which expanded the Bank of England's Special Resolution Regime to include temporary transfers to a publicly controlled bridge bank for maintaining essential services like deposits and payments. A notable early use occurred on 30 March 2009 with the Dunfermline Building Society, the UK's largest building society failure at the time, where £1.6 billion in performing mortgages and deposits were transferred to a bridge bank before sale to Nationwide Building Society, limiting losses to the Financial Services Compensation Scheme at £521 million while avoiding broader contagion.^[25]^[26] In other regions, adoption has been uneven but guided by international standards. The International Monetary Fund has highlighted bridge banks in post-crisis recommendations for emerging markets, noting their role in segregating good assets during restructurings, as seen in analytical frameworks for Asia and Latin America, though empirical use post-2008 remains limited outside advanced economies due to capacity constraints in resolution authorities. For instance, while some Asian jurisdictions like South Korea incorporated resolution tools post-crisis, bridge banks have gained traction more recently in South Asia amid non-performing loan surges, underscoring gradual global diffusion amid varying institutional readiness.^[27]^[28]

Operational Mechanism

Asset and Liability Transfer Process

The asset and liability transfer process in a bridge bank resolution begins with the declaration of a depository institution's default by its chartering authority, triggering the appointment of the Federal Deposit Insurance Corporation (FDIC) as receiver under Section 11 of the Federal Deposit Insurance Act (12 U.S.C. § 1821).^[29] The FDIC, in its role as receiver, then organizes a temporary bridge bank—typically chartered by the Office of the Comptroller of the Currency (OCC) as a national bank— to facilitate continuity of critical operations.^[4] This step allows the FDIC to exercise broad discretion in selecting and transferring assets and liabilities from the failed institution to the bridge bank without requiring third-party approvals, consents, or other actions, thereby minimizing disruptions to depositors and counterparties.^[29] The transfer itself is executed via a purchase and assumption agreement or similar instrument between the receiver and the bridge bank, often completed within hours of receivership to maintain seamless operations.^[30] Assets transferred typically include insured deposits, performing loans, and other viable holdings deemed recoverable, while impaired or "bad" assets—such as non-performing loans or illiquid securities—are retained in the receivership for orderly liquidation or sale, isolating losses from the Deposit Insurance Fund (DIF).^[31] Liabilities assumed by the bridge bank encompass substantially all deposit accounts and certain qualified financial contracts (QFCs), with special continuity provisions ensuring no early termination rights are triggered for solvent counterparties.^[10] For instance, in the March 13, 2023, resolution of Silicon Valley Bank, the FDIC transferred approximately $209 billion in assets and $175 billion in deposits to Silicon Valley Bridge Bank, N.A., excluding around $40 billion in held-to-maturity securities to shield the DIF from immediate losses.^[30] Post-transfer, the bridge bank operates under FDIC management, with the receiver providing advance funding if needed to cover liquidity shortfalls, repayable from future collections on retained assets.^[29] The process prioritizes least-cost resolution, as mandated by statute, by enabling the bridge bank to function as a "clean" entity attractive to potential acquirers during a marketing period of up to two years (extendable by the FDIC).^[7] In jurisdictions adopting similar frameworks, such as under the European Union's Bank Recovery and Resolution Directive (BRRD), the transfer to a bridge institution follows analogous steps but may incorporate bail-in powers to write down equity or subordinated debt before or alongside the transfer, ensuring creditor hierarchies are respected.^[32] Empirical evidence from U.S. cases, including Signature Bank on March 12, 2023, demonstrates that selective transfers preserve systemic stability, with bridge banks repaying all DIF advances plus interest in resolutions like IndyMac Bank in 2008.^[33]

Regulatory Oversight and Temporary Charter

Bridge banks are chartered by the Office of the Comptroller of the Currency (OCC) as temporary national banks under the authority of the Federal Deposit Insurance Act (12 U.S.C. § 1821), enabling the Federal Deposit Insurance Corporation (FDIC) to transfer assets and liabilities from a failed insured depository institution.^[2] The FDIC, acting as receiver, requests the charter immediately upon the institution's closure, with the OCC approving it to facilitate rapid operations; for instance, Silicon Valley Bridge Bank, N.A., was chartered on March 13, 2023.^[34] This process removes the failed institution's board and executives, allowing the FDIC to appoint new management and ensure continuity of essential services.^[35] Regulatory oversight of bridge banks falls primarily under the FDIC, which owns, operates, and supervises the entity while adhering to standard banking regulations applicable to national banks, including those enforced by the OCC and, if applicable, the Federal Reserve.^[2] The FDIC maintains a dual role as both receiver of the failed bank and supervisor of the bridge bank, prioritizing least-cost resolution to minimize losses to the Deposit Insurance Fund; this involves rigorous monitoring of operations, asset management, and compliance with safety and soundness standards.^[35] The FDIC Board of Directors retains ultimate authority over strategic decisions, such as asset transfers and extensions of operations.^[35] The temporary charter underscores the bridge bank's role as an interim vehicle, with operations limited to an initial two-year period, extendable by up to three one-year increments under specific conditions, or terminating earlier upon the sale of stock or assumption of liabilities by a third party.^[2]^[35] This structure, rooted in the Competitive Equality Banking Act of 1987 and extended to broader use post-2008, aims to stabilize the institution long enough for orderly resolution without indefinite government ownership.^[2] In practice, such as with the 2023 bridge banks for Silicon Valley Bank and Signature Bank, the FDIC operated them briefly before transferring to acquirers, demonstrating the charter's focus on short-term bridging to market solutions.^[36]

Implementation by Jurisdiction

United States

In the United States, the Federal Deposit Insurance Corporation (FDIC) employs bridge banks—temporary national banks chartered by the Office of the Comptroller of the Currency (OCC)—as a resolution tool for failed insured depository institutions, enabling the seamless transfer of assets, liabilities, and operations to maintain continuity for depositors and counterparties while the FDIC markets the institution or its components to potential acquirers.^[12] This mechanism, which allows the bridge bank to operate under FDIC control for up to two years (with possible six-month extensions), minimizes systemic disruption by avoiding immediate liquidation and preserving franchise value.^[2] The FDIC appoints the bridge bank's board of directors and chief executive officer, ensuring regulatory oversight and operational stability during the interim period.^[37] The statutory authority for bridge banks originated with the Competitive Equality Banking Act of 1987, which permitted the FDIC to establish such entities only after an insured bank had been declared insolvent and placed into receivership. This framework was expanded under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989, allowing preemptive action before formal insolvency to facilitate smoother transitions.^[21] In practice, the FDIC, acting as receiver, selectively transfers qualified financial contracts, deposits, and viable assets to the bridge bank, while isolating problematic elements; counterparties must continue performing under transferred contracts, subject to limited repudiation rights.^[10] This approach has been particularly applied to larger or more complex failures where rapid purchase-and-assumption transactions are infeasible.^[14]

FDIC-Led Examples

Bridge banks saw limited early use following their authorization, with the FDIC favoring whole-bank purchase-and-assumption deals during the savings and loan crisis of the late 1980s and early 1990s.^[12] Their deployment increased in scenarios requiring extended resolution timelines, as evidenced in 2023 amid regional bank stresses. On March 10, 2023, following the closure of Silicon Valley Bank (SVB) by California regulators due to liquidity shortfalls from unrealized losses on securities holdings, the FDIC created Silicon Valley Bridge Bank, N.A., transferring all deposits (approximately $175 billion) and substantially all assets to ensure uninterrupted access for depositors, including those exceeding the $250,000 insurance limit via systemic risk exception.^[37] The bridge bank operated branches, ATMs, and online services seamlessly, with the FDIC retaining non-deposit liabilities for separate resolution; on March 27, 2023, First-Citizens Bank & Trust Company acquired the majority of assets and assumed deposits, ending the bridge phase after 17 days.^[31] Similarly, on March 12, 2023, after New York regulators seized Signature Bank amid deposit runs tied to crypto exposures, the FDIC established Signature Bridge Bank, N.A., transferring all deposits (about $110 billion) and most assets to stabilize operations.^[38] This bridge entity maintained customer access to funds and services, with full deposit insurance invoked; Flagstar Bank (a subsidiary of New York Community Bancorp) purchased the deposits and assets on March 19, 2023, resolving the bridge bank within a week.^[39] These 2023 cases marked the first instances of bridge banks for systemic regional failures since the tool's inception, highlighting their role in cost containment—SVB's resolution cost the Deposit Insurance Fund an estimated $20 billion, though offset by later asset recoveries—and in averting broader contagion, though critics noted high operational expenses during the bridge period.^[17]

FDIC-Led Examples

The Federal Deposit Insurance Corporation (FDIC) has employed the bridge bank mechanism sparingly since gaining statutory authority under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), with early uses limited to temporary operations of failed institutions during the savings and loan crisis resolution.^[12] One of the first documented instances involved two bridge banks chartered in 1992, each operating for less than six months to facilitate asset stabilization and transfer amid thrift liquidations overseen by the Resolution Trust Corporation, though these were primarily thrift-focused rather than commercial banks.^[40] A prominent FDIC-led bridge bank example occurred with IndyMac Bank, F.S.B., which failed on July 11, 2008, amid the subprime mortgage crisis, marking the largest bank failure in U.S. history at the time with approximately $32 billion in assets.^[14] The FDIC placed IndyMac into conservatorship initially, then receivership, and chartered IndyMac Federal Bank, F.S.B., as a bridge bank to assume insured deposits, certain liabilities, and viable assets, allowing operations to continue without interruption for depositors.^[41] The bridge bank operated for over 20 months, during which the FDIC imposed losses on $2.6 billion in subordinated debt and preferred stock, managed deposit runs exceeding $1.3 billion in a single week post-failure, and eventually transferred operations to IMB Holdco, Inc. (later rebranded as OneWest Bank) in a March 2009 purchase and assumption agreement for $13.9 billion in deposits and select loans, with the FDIC retaining nonperforming assets in a loss-sharing arrangement.^[14]^[40] This resolution cost the Deposit Insurance Fund an estimated $12.4 billion, highlighting challenges in valuing mortgage-related assets during market distress.^[42] In March 2023, amid rapid deposit outflows triggered by interest rate hikes and unrealized securities losses, the FDIC invoked bridge banks for two large regional failures: Silicon Valley Bank (SVB) and Signature Bank. For SVB, which collapsed on March 10, 2023, with $209 billion in assets, the FDIC created Silicon Valley Bridge Bank, N.A., transferring all deposits (including uninsured ones via a systemic risk exception) and substantially all assets to maintain operations over the weekend.^[37] The bridge bank borrowed extensively from the Federal Reserve's discount window to cover $42 billion in outflows by March 13, preserving client access to funds and stabilizing tech-sector confidence, before the FDIC sold the entity to First Citizens BancShares on March 26, 2023, for $16.5 billion in loans and all deposits excluding certain broker-held accounts, with loss-sharing on commercial loans.^[37]^[43] Similarly, Signature Bank, N.A., failed on March 12, 2023, with $110 billion in assets, prompting the FDIC to establish Signature Bridge Bank, N.A., which assumed all deposits and most assets to avert contagion in commercial real estate and crypto-related exposures.^[15] Operations continued seamlessly, but outflows necessitated liquidity support; on March 20, 2023, the FDIC transferred substantially all deposits and select loan portfolios to Flagstar Bank, N.A. (a subsidiary of New York Community Bancorp), excluding $3.3 billion in venture capital and crypto-linked deposits, while retaining riskier assets for orderly wind-down.^[15] These 2023 cases demonstrated the bridge bank's utility for complex, uninsured-heavy failures, enabling the FDIC to market franchises amid volatility, though they incurred no immediate losses to the Deposit Insurance Fund due to buyer premiums and government backstops.^[17]

Nigeria

In Nigeria, bridge banks serve as a resolution tool for systemically important failed institutions, authorized under the Nigeria Deposit Insurance Corporation (NDIC) Act of 2006 and operationalized by the Central Bank of Nigeria (CBN) and NDIC to transfer viable assets and liabilities from distressed banks, minimizing disruptions to depositors and financial stability.^[44] This mechanism was introduced to address insolvency without immediate liquidation, providing a temporary operating entity recapitalized by regulators until privatization or merger.^[45] The primary applications occurred during the post-2009 banking crisis resolution, when special audits revealed non-performing loans exceeding 40% of assets in several banks due to governance failures and risk mismanagement.^[46] On August 5, 2011, the CBN revoked licenses of three insolvent banks—Afribank Nigeria Plc, Bank PHB Plc, and Spring Bank Plc—and established corresponding bridge banks: Mainstreet Bank Limited, Keystone Bank Limited, and Enterprise Bank Limited, respectively. These entities assumed selected assets worth approximately ₦1.5 trillion and liabilities including ₦1.02 trillion in deposits, enabling continuity of services for over 5 million customers while isolating toxic loans.^[47] The NDIC provided liquidity support, and the Asset Management Corporation of Nigeria (AMCON) later injected capital, preventing a broader contagion that could have eroded public confidence amid the global financial aftershocks.^[46] A subsequent case arose in September 2018, when the CBN revoked the operating license of Skye Bank Plc for capital inadequacy and poor risk management, transferring its assets (valued at ₦2.8 trillion) and ₦2.4 trillion in liabilities to Polaris Bank Limited as a bridge bank.^[48] Polaris operated under NDIC oversight, safeguarding depositors and maintaining branches, with AMCON recapitalizing it via ₦20 billion in Tier 2 capital.^[49] By 2021, NDIC reported that the 2011 bridge banks collectively preserved 12,667 jobs and averted systemic collapse by ring-fencing viable operations from impaired assets.^[47] These bridge banks were eventually privatized through competitive bids: Mainstreet, Keystone, and Enterprise sold in 2014 to investors including BUA Group and Fidelity Bank, while Polaris was acquired by Unity Bank stakeholders in 2022 after core investor sales.^[50] Despite successes in deposit protection, challenges included prolonged resolution timelines—averaging three years—and recovery rates below 20% on transferred non-performing loans, attributed to weak collateral enforcement in Nigeria's legal system.^[51] NDIC evaluations highlight bridge banks' superiority over outright liquidation for large institutions but note dependency on timely privatization to avoid fiscal burdens.^[45]

Applications During Banking Crises

In the aftermath of Nigeria's 2009 banking crisis, triggered by excessive risk-taking, non-performing loans from stock market exposure, and the global financial downturn, the Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporation (NDIC) utilized bridge banks as a resolution tool for systemically impaired institutions unable to meet recapitalization requirements.^[52]^[53] Following special examinations initiated in July 2009 that identified capital shortfalls in multiple banks, initial interventions included CEO removals and liquidity injections totaling approximately ₦620 billion across eight banks.^[52]^[54] By August 5, 2011, the CBN revoked the operating licenses of three persistently non-viable banks—Afribank Nigeria Plc, Bank PHB Plc, and Spring Bank Plc—due to their failure to achieve mandatory capital adequacy and ongoing insolvency risks.^[53]^[55] The NDIC promptly established three corresponding bridge banks to acquire and operate the viable assets and liabilities of these institutions, ensuring continuity of essential services, protection of depositors (up to insured limits), and prevention of broader systemic contagion.^[56] Specifically, Enterprise Bank Limited assumed Afribank's operations, Keystone Bank Limited took over Bank PHB's, and Mainstreet Bank Limited handled Spring Bank's, with transferred deposits exceeding ₦1 trillion across the entities.^[57]^[58] These bridge banks operated under temporary NDIC charters, focusing on stabilizing operations, recovering assets, and preparing for private sector acquisition while minimizing fiscal costs compared to outright nationalization.^[51] The mechanism aligned with the Banks and Other Financial Institutions Act (as amended) and NDIC Act, enabling rapid transfer without immediate liquidation, though it relied on public funds for initial bridging via the Asset Management Corporation of Nigeria (AMCON) for toxic assets.^[59] By 2014, the bridge banks were successfully auctioned to investors—Heritage Bank acquired Enterprise Bank, Skye Bank (now Polaris Bank) purchased Mainstreet Bank, and Keystone Bank attracted consortium bids—marking the resolution's completion without depositor losses beyond insured amounts.^[60] This application demonstrated bridge banks' role in orderly wind-downs during acute crises, though subsequent critiques highlighted dependency on government recapitalization exceeding ₦879 billion in public funds.^[61]^[59]

Other Countries

In Europe, the bridge institution tool forms a key component of the European Union's Bank Recovery and Resolution Directive (BRRD), enabling resolution authorities to transfer assets and liabilities from a failing bank to a temporary entity to maintain critical functions and facilitate an orderly sale or wind-down.^[62] A prominent example occurred in Portugal on August 3, 2014, when the Bank of Portugal resolved Banco Espírito Santo S.A. (BES), a systemically important institution facing insolvency due to heavy losses from related-party exposures and non-performing loans exceeding €3.5 billion.^[63] The resolution involved transferring viable assets and liabilities valued at approximately €57 billion to Novo Banco, a newly created bridge bank fully owned by the Portuguese Resolution Fund, which injected €4.9 billion in equity to ensure operational continuity for depositors and counterparties.^[64]^[65] This approach preserved financial stability but drew scrutiny for subsequent capital shortfalls at Novo Banco, requiring additional public funds totaling over €3 billion by 2017 to cover legacy losses. In Asia, Japan pioneered the bridge bank model amid its 1990s banking crisis, where non-performing loans reached ¥100 trillion (about 20% of GDP) due to asset bubbles and delayed recognition of losses. The Deposit Insurance Corporation of Japan (DICJ) established the Bridge Bank of Japan (BBJ) on March 19, 2002, under the Deposit Insurance Act, granting it licenses for banking and corporate bond trust operations to assume assets from failed institutions like Hokkaido Takushoku Bank and Yamaichi Securities' banking arms.^[66] The BBJ operated temporarily, managing deposits and loans until private buyers or liquidation could be arranged, with its operations concluding by September 5, 2014, after resolving transferred portfolios without systemic disruption.^[67] This mechanism, funded initially through DICJ resources backed by government guarantees up to ¥13 trillion, emphasized rapid asset segregation to minimize moral hazard and taxpayer exposure, contrasting with earlier forbearance policies that prolonged Japan's "lost decade."^[68] In Africa, bridge bank applications remain limited outside Nigeria but have been deployed in response to acute solvency crises. Ghana provides a key instance: on August 16, 2018, the Bank of Ghana revoked operating licenses from five undercapitalized banks—UniBank Ghana, The Sovereign Bank, The Royal Bank, Beige Bank, and Construction Bank—due to capital shortfalls totaling over GHS 8 billion (approximately $1.7 billion) from governance failures and insider lending.^[69] Operations were transferred to Consolidated Bank Ghana Limited, a state-owned entity acting as a bridge bank under section 127(11) of Ghana's Banks and Specialised Deposit-Taking Institutions Act, safeguarding about 500,000 depositors and enabling asset recovery while pursuing mergers or sales.^[69] This intervention, supported by a government recapitalization of GHS 2.2 billion for the bridge entity, stabilized the sector amid a cleanup that exposed systemic risks from weak supervision, though recovery rates for creditors varied below 50% in some cases due to impaired loans.^[69]

Examples from Europe, Asia, and Africa

In Europe, Italy applied the bridge institution tool under the EU's Bank Recovery and Resolution Directive (BRRD) to resolve four regional cooperative banks in November 2015: Banca delle Marche, Banca Popolare dell'Etruria e del Lazio, Cassa di Risparmio di Ferrara, and Cassa di Risparmio di Chieti. Regulators transferred viable assets and liabilities—totaling approximately €11.5 billion in loans and deposits—to newly established bridge banks (Nuova Banca delle Marche, Nuova Banca Etruria, Nuova Cassa di Risparmio di Ferrara, and Nuova Cassa di Risparmio di Chieti), which operated temporarily under administrative oversight to maintain critical functions and depositor access. Non-performing assets, valued at over €1.5 billion in losses, were isolated into separate asset management companies backed by contributions from the Italian resolution fund and shareholder equity, avoiding direct state recapitalization and minimizing systemic risk.^[70]^[71] In Asia, Bangladesh adopted bridge bank provisions through the Bank Resolution Ordinance enacted on May 11, 2025, enabling the Bangladesh Bank to create temporary institutions for seizing control of failing banks, transferring assets and liabilities, and ensuring operational continuity amid a sector plagued by non-performing loans exceeding 10% of total assets in 2024. This framework, aligned with IMF recommendations under a $4.7 billion loan program, allows for bridge banks to manage critical functions until resolution via sale, merger, or liquidation, though as of October 2025, no specific failing bank has been transferred to a bridge entity; instead, it facilitated mergers like the October 2025 consolidation of five Islamic banks into a single Shariah-compliant entity with injected capital.^[72]^[73]^[74] Examples in Africa outside Nigeria remain limited, with resolution regimes in jurisdictions like South Africa emphasizing orderly wind-downs or sales over dedicated bridge banks, as seen in the South African Reserve Bank's handling of African Bank Limited's 2014 failure via a "good bank/bad bank" split without a formal temporary charter institution. Sub-Saharan frameworks often prioritize bail-ins or asset separations due to institutional capacity constraints, with World Bank analyses noting that while bridge-like transfers are theoretically available, their use is rare owing to weak legal enforcement and cross-border complexities involving pan-African banks.^[75]

Effectiveness and Empirical Outcomes

Success Metrics and Case Studies

Success metrics for bridge bank resolutions primarily encompass cost to the Deposit Insurance Fund (DIF), operational continuity for depositors and counterparties, resolution speed, and mitigation of systemic contagion. The FDIC prioritizes least-cost resolutions under federal law, aiming for zero DIF impact where possible by transferring viable assets and liabilities to a purchasing institution, often after a brief bridge period to stabilize operations. Empirical assessments highlight that bridge banks enable rapid transfers—typically over a weekend—preserving franchise value and avoiding fire-sale discounts on assets, though outcomes depend on underlying asset quality and market conditions.^[76]^[77] In practice, successful bridge bank interventions demonstrate high depositor retention rates, with insured deposits fully protected and uninsured deposits often continuing uninterrupted when transferred promptly. For instance, bridge structures have facilitated recoveries exceeding immediate liquidation values by providing time for competitive bidding, as evidenced in post-2008 analyses of failed bank auctions where temporary operations preserved ongoing cash flows. However, metrics reveal variability: while some resolutions achieve net DIF gains through asset sales, others incur losses from impaired loans or securities, underscoring that bridge banks excel in continuity but not always in cost recovery amid rapid deteriorations.^[78]^[79] A key case study is the 2008 resolution of IndyMac Bank, F.S.B., closed by the Office of Thrift Supervision on July 11, 2008, after a bank run depleted $1.3 billion in deposits over 11 days. The FDIC established IndyMac Federal Bank, F.S.B., as a bridge bank, transferring insured deposits and substantially all assets to maintain operations and prevent further outflows. This stabilization allowed marketing of the institution, culminating in its 2009 acquisition by IMB Holdco, LLC (rebranded OneWest Bank), for select assets including $13.9 billion in loans. Despite operational success in averting immediate collapse, the resolution yielded a $12.4 billion DIF loss, the highest at the time, driven by mortgage portfolio impairments rather than bridge mechanics.^[80]^[14]^[81] The 2023 Silicon Valley Bank (SVB) failure illustrates bridge bank utility in modern crises. Closed by California regulators on March 10, 2023, amid $42 billion in withdrawals (85% uninsured deposits), the FDIC created Silicon Valley Bridge Bank, N.A., that day, transferring all deposits and most assets ($209 billion total) to ensure seamless access. On March 26, 2023, First-Citizens Bank & Trust Company assumed all deposits and loans via purchase and assumption agreement, with the FDIC retaining a loss-sharing arrangement on commercial loans up to 80%. This 16-day bridge period minimized disruption but incurred substantial DIF costs—initial estimates exceeding $20 billion—owing to unrealized losses on held-to-maturity securities, though systemic risk exceptions protected all depositors without taxpayer funding. The approach contained contagion, as no widespread runs followed despite SVB's tech-sector focus.^[37]^[17]^[82] Signature Bank, resolved concurrently on March 12, 2023, followed a parallel path: the FDIC formed Signature Bridge Bank, N.A., transferring $110 billion in assets and all deposits, then sold to Flagstar Bank, N.A. (a New York Community Bancorp subsidiary) on March 19, 2023, excluding certain real estate loans. Metrics showed full depositor continuity and rapid divestiture, but like SVB, it highlighted bridge banks' expense in high-velocity failures, with combined 2023 resolutions costing the DIF approximately $22.3 billion before recoveries. These cases affirm bridge banks' role in buying resolution time, enabling value-preserving sales over liquidation, though empirical data indicate higher upfront liquidity needs and potential losses when asset marks decline sharply.^[43]^[17]^[77]

Criticisms and Operational Challenges

Bridge banks, while designed to ensure operational continuity during resolution, have drawn criticism for their high costs to the deposit insurance fund and taxpayers, as evidenced by the 2023 failures of Silicon Valley Bank (SVB) and Signature Bank, where the Federal Deposit Insurance Corporation (FDIC) estimated losses exceeding $20 billion for SVB alone due to rapid asset devaluation and deposit outflows.^[37] FDIC Acting Chair Travis Hill highlighted that these events underscored the "costly and damaging" nature of bridge bank strategies, prompting regulatory shifts away from mandating them in large bank resolution plans.^[83] A core operational challenge is the "melting ice cube" effect, where bridge institutions experience accelerated deposit runs and franchise value erosion as clients migrate to perceived safer alternatives, as observed in SVB and Signature bridge banks with billions in outflows shortly after activation.^[17] This phenomenon, also noted in earlier cases like IndyMac Federal in 2008, complicates stabilization efforts and increases resolution expenses, with FDIC reports emphasizing the need for rapid asset transfers and contract continuity amid such pressures. Internationally, the temporary charter of bridge banks—often limited to one or two years—poses risks to long-term viability, as seen in Poland's 2022 experience where the short duration hindered financial stability maintenance and asset sales.^[84] In Portugal's Novo Banco, established in 2014 as a bridge institution from Banco Espírito Santo's resolution, operational handover succeeded initially but led to protracted challenges, including multiple recapitalizations totaling over €4 billion in state aid by 2017 due to difficulties in achieving a permanent sale and persistent losses.^[85] Critics, including rating agencies, have questioned the predictability and effectiveness of such resolutions, arguing they can prolong uncertainty and expose public funds to ongoing risks.^[86] Further challenges include complexities in valuing and transferring complex assets like derivatives portfolios, which demand swift regulatory coordination to avoid market disruptions, as detailed in FDIC operational reviews of the 2023 crises.^[17] These issues have fueled broader debates on moral hazard, with some analyses suggesting bridge banks may incentivize risky behavior by signaling government backstops, though empirical outcomes vary by jurisdiction and failure scale.^[32]

Legal and Regulatory Frameworks

United States Provisions

The Federal Deposit Insurance Corporation (FDIC) derives its authority to establish and operate bridge banks from Section 11(n) of the Federal Deposit Insurance Act (FDI Act), codified at 12 U.S.C. § 1821(n).^[29] This provision empowers the FDIC, upon appointment as receiver for a failed insured depository institution, to charter a temporary "bridge depository institution" as a new national bank or federal savings association, subject to approval by the Office of the Comptroller of the Currency (OCC) for national charters.^[4] The bridge bank serves to receive transfers of assets, liabilities, and operations from the failed institution, enabling continuity of essential banking services while the FDIC markets the franchise for potential sale or orderly wind-down.^[2] Under 12 U.S.C. § 1821(n)(1)(B), the FDIC may transfer any assets or liabilities of the receivership estate to the bridge bank at its discretion, including qualified financial contracts, without requiring counterparty consent, though certain repudiations or disaffirmations remain possible as in standard receiverships.^[10] Bridge banks are fully insured by the FDIC up to applicable deposit insurance limits and must adhere to federal banking laws, but they operate under expedited FDIC oversight to prioritize stabilization over long-term viability.^[87] The FDIC retains flexibility to merge the bridge bank with another institution, transfer its assets back to the receivership, or liquidate it once a resolution strategy is executed, typically within a short timeframe to minimize costs to the Deposit Insurance Fund.^[2] The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 bolstered the bridge bank framework indirectly through enhanced resolution planning requirements for large insured depository institutions (IDIs) with over $100 billion in assets, mandating plans that incorporate bridge bank strategies to facilitate rapid transfer and minimize systemic risk.^[88] However, core operational authority for IDI bridge banks remains rooted in the FDI Act, distinct from Title II of Dodd-Frank, which applies to nonbank financial companies designated as systemically important and authorizes FDIC-appointed receiverships with similar but broader stabilization tools.^[89] Counterparties to contracts with bridge banks are legally bound to continue performance, enforceable under 12 U.S.C. § 1821(e)(13), underscoring the mechanism's design to preserve operational continuity amid failure.^[10]

International Variations and Harmonization Efforts

In the European Union, the Bank Recovery and Resolution Directive (BRRD) of 2014 authorizes the use of a bridge institution as one of six resolution tools, enabling the Single Resolution Board (SRB) under the Single Resolution Mechanism (SRM) to transfer assets and liabilities from a failing bank to a temporary entity owned by the resolution authority, ensuring continuity of critical functions while minimizing taxpayer exposure.^[62] This approach aligns with post-2008 reforms but differs from the U.S. model by integrating bail-in powers more prominently alongside bridge transfers, with the SRM centralizing decision-making for euro area banks to facilitate cross-border consistency.^[90] In the United Kingdom, the Prudential Regulation Authority (PRA) under the Bank of England employs bridge bank powers via the Banking Act 2009, allowing transfers to a publicly owned temporary bank for stabilization, as enhanced by the Bank Resolution (Recapitalisation) Act 2025, which introduces recapitalization options to support bridge operations without immediate bail-in.^[91] This framework emphasizes national control post-Brexit, diverging from the EU's supranational SRM by prioritizing domestic financial stability and creditor hierarchies tailored to UK law.^[92] Harmonization efforts center on the Financial Stability Board's (FSB) Key Attributes of Effective Resolution Regimes, first issued in 2011 and revised in 2024, which designate bridge institutions as an essential tool for orderly failure management, requiring jurisdictions to grant resolution authorities powers for asset transfers, operational continuity, and no-creditor-worse-off protections to mitigate systemic risk in cross-border contexts.^[93] Endorsed by G20 leaders, these attributes have driven over 25 major economies to adopt compatible regimes by 2023, though variations persist in scope—such as EU-wide funding via the Single Resolution Fund versus national funds elsewhere—potentially complicating resolutions for global systemically important banks (G-SIBs).^[94] Empirical assessments indicate partial convergence, with FSB peer reviews noting gaps in implementation, like limited cross-border cooperation mechanisms outside the EU.^[95]

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