A bridge bank is one intended to continue with the activity of a credit institution in a situation of future sale or potential disappearance. For this, it assumes your business and the management of its assets and liabilities.
In the field of banking, the bridge bank is an entity created and set up to assume, temporarily, the balance of another in the process of disappearing.
In other words, both the assets and liabilities of the bankrupt bank are accommodated in the structure of the bridge to facilitate its operation momentarily.
Although it varies depending on the banking law or the regulatory framework of each country, banks with a bridge nature are undertaken by the State. This is done hand in hand with its main supervisory institutions as a method of protecting the local economy and its banking system.
The bridge bank as a transitory entity
The period of time in which a bridge bank is put into operation can usually reach up to three years. During this stage, business continuity and customer protection must be established.
The completion of this work will coincide with the final purchase of the bankrupt bank or its eventual disappearance regulated by the supervisory entities of the territory.
In this sense, when setting up a bridge bank, government bodies seek measures to protect the economy. In other words, they seek to curb possible contagion effects (due to systemic risk) and the appearance of banking crises.
Compared to other banking alternatives or modalities, the bridge bank has the following characteristics to be highlighted:
- Temporality criterion: The existence of every bridge bank has a predefined calendar and close to completion.
- Supervised entity: In all countries there are different regulatory bodies in banking matters. The creation and start-up of bridge-type banks is part of its management work.
- Continuity function: Bridge banks must ensure the continuity of the troubled bank’s activity to the extent possible and until a new buyer is located or its effective dissolution.
- Protection element: The very existence of this type of bank is considered as a method of defending the interests of clients and depositors of the bank that is insolvent or about to disappear.
It is necessary to point out that there are occasions in which a bridge bank is set up confidentially.
This fact usually responds to the need to stop contagious effects in a given economic system. At the same time, it seeks to prevent the flight of depositors or clients of the original entity.
The information regarding the changes is transferred to clients and shareholders once the continuity of the business has been ensured. This, in the figure of this chosen transitory bank.