What is a Bridge Bank?

Mary McMahon

A bridge bank is a temporary financial institution created to assume the liabilities and assets of a bank that has failed. Bridge banks are used to secure the bank and keep it operational while a buyer is located or the bank is liquidated. The Federal Deposit Insurance Corporation (FDIC) has the authority to charter such institutions under the Competitive Equality Banking Act of 1987. It has a number of other legal powers that allow it to intervene with failing financial institutions in order to protect depositors, as well as the economy in general.

Man climbing a rope
Man climbing a rope

When a bank is identified as troubled, steps can be taken to establish a bridge bank. The bridge bank has up to three years to either find a buyer for the bank or liquidate it. It is chartered like other financial institutions and is required to maintain business as usual as much as possible in addition to submitting documentation of its activities to regulators. Existing loans and other liabilities are honored and the bridge bank also assumes all deposits and assets under the control of the failed bank.

At the time of the takeover, customers are notified using the most recent information on file. Because the timing of takeovers is not disclosed to avoid creating panics, the notifications are sent out after the bridge bank has taken over. They are provided with information about the takeover and how it will impact their accounts in these mailed notices. Account numbers will still be valid, ensuring that direct deposit and other activities are not interrupted, and customers can continue to use existing checks and bank cards.

Bridge banks typically require some time to review financial records, but attempt to complete a takeover as quickly as possible so that customers of the bank will not be inconvenienced. If a buyer cannot be located within three years, the bridge bank must notify regulators. The regulators will step in to assume and liquidate the bank.

For bank customers, there may be little change under the supervision of a bridge bank. Their deposits are still insured with the FDIC, they will continue to pay on loans, and materials they have in safe deposit boxes are still secured. Customers can opt to remain with the bank through its transition and eventual sale and are often encouraged to do so to avoid a bank run, a panic where too many customers attempt to close their accounts at the same time.

Discuss this Article

Post your comments
Forgot password?