A bridge bank is an institution created by a national regulator or central bank to operate a failed bank until a buyer can be found for its operations.
While national laws vary, the bridge bank is usually established by a publicly backed deposit insurance organisation or financial regulator and may be instituted to avoid systemic risk 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.
In the US, bridge banks operate under supervision of the Federal Deposit Insurance Corporation.
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