What is a bridge bank?
A bridge bank is a bank or similar institution that is authorised to hold the assets and liabilities of another bank, usually one that has become insolvent. In effect, the bridge bank manages the insolvent bank on a caretaker basis.
Where have you heard about bridge banks?
As an investor, you may have heard about bridge banks in the event of a bank in which you own shares or with which you have deposited money becoming insolvent. Your financial adviser may have drawn your attention to the appointment of a bridge bank, or you may have read about such an appointment in the financial media.
What you need to know about bridge banks.
A bridge bank is appointed by the Federal Deposit Insurance Corporation (FDIC), the body that guarantees bank deposits in the US. It is usually a bank but can also be a federal savings association. Bridge banks were made possible by the 1987 Competitive Equality Banking Act, whose prime purpose was to strengthen the Federal Savings & Loan Insurance Corporation, FDIC's sister-organisation that insures savings and loans companies . A bridge bank can run the insolvent bank for up to three years, by which time it is hoped the troubled bank will either have been bought by a healthy institution or have returned itself to solvency. Alternatively, it may have been liquidated by that point.