Close on a Friday, open on a Monday. This is the underlying concept of a bank failure resolution through a Bridge Bank which the Philippine Deposit Insurance Corporation (PDIC) is proposing as an institutional strengthening measure to support an increase in the maximum deposit insurance coverage. PDIC President Jose C. Nograles said that this will protect depositors of a failed bank by ensuring that there will be no disruption in banking services hence, maintain depositor confidence in the system.

A Bridge Bank is a temporary bank established and operated by the receiver of a closed bank which in the case of the Philippines is the PDIC, to acquire the assets and assume the liabilities of a closed bank. The bridge bank will have the “good assets” and insured deposits of a failed institution. The “bad assets” and uninsured deposits will remain with the receiver for liquidation. The bridge bank will be operated for a limited period during which a suitable resolution will be identified. This may be in the form of a sale to a new investor, purchase and assumption or mergers and consolidation. If no resolution is reached within said period, it will be liquidated. A bridge bank preserves the franchise value of a failed institution prior to its sale to a new investor, its purchase and assumption or merger and consolidation.

Nograles said that a bridge bank will therefore provide allowance in terms of time for a better and well-planned final resolution of a failed bank. He also said that this resolution method will be less costly to the deposit insurer because it will not require outright payout to depositors and liquidation of the remaining assets of the failed bank.

The bridge bank concept originated from the United States with the enactment of the Competitive Equality of Banks Act of 1987. The Federal Deposit Insurance Corporation (FDIC) was the first to establish a bridge bank in 1987. In July 2008, following the collapse of IndyMac Bank, one of the largest thrift banks in the United States, FDIC created a bridge bank, IndyMac Federal Bank. FDIC Chief Operating Officer, John Bovenzi was appointed Chief Operating Officer of the bridge bank. At a recent Conference in Washington D.C. hosted by the FDIC, Nograles discussed the bridge banking concept with Bovenzi. He also met with other ranking FDIC officials on the matter.

Bridge banking is an international best practice which was likewise adopted by deposit insurance systems in Japan, Taiwan and Korea. It is one of the 21 Core Principles for Effective Deposit Insurance Systems published by the International Association of Deposit Insurers (IADI). The Core Principles are designed to enhance the effectiveness of deposit insurance systems and are based on IADI research and guidance papers and practical experience of members, associates and observers. The IADI is an international organization of 52 deposit insurers established to contribute to the stability of financial systems worldwide. The PDIC is a founding member of the organization and Nograles is a member of its policy making Executive Council.