The History of Bridge Banks in
the United States
Jack Reidhill, Lee
Davison, and Elizabeth
Williams
Federal Deposit
Insurance Corporation
Introduction
• FDIC bridge bank authority was a result of the
1980s banking crisis.
• This authority has been used only ten times, the
last time was in 1994.
• Prior to the crisis, failure resolution was
generally a simple process, using either a
purchase and assumption transaction or a
deposit payout.
• Despite the banking crisis, it took until 1987 for
the FDIC to have the flexibility to take over a
bank and run it until a viable resolution strategy
was developed.
Presentation Outline
• The FDIC’s use of Deposit Insurance National
Banks before it was granted bridge bank
authority.
• The difficulties of using open bank assistance to
resolve large complex banks.
• How the FDIC’s use of bridge banks changed
from 1988 to 1994.
• Lessons from the FDIC’s experience.
An Early Precursor: Deposit
Insurance National Banks
• The Banking Act of 1933 did not give the FDIC
authority to pay insured depositors directly.
• Instead, depositors were paid through a newly
chartered national bank.
• These were called Deposit Insurance National
Banks (DINBs).
• Between 1933–1935, 24 depositor payoffs were
made through DINBs.
Deposit Insurance National Bank
1933-1935
Failed Bank
Receivership
Retained most assets, all uninsured
deposits, other claimants,
Subrogated insured deposit claim (FDIC)
Collected on assets
DINB
Assumed all insured deposits,
Bank building, and contents
Paid out
deposits
The Commercial National
Bank of Bradford Failed in 1935
Receivership
Retained most assets, all uninsured deposits, other claimants,
subrogated insured deposit claim (FDIC)
DINB
Assumed all insured deposits, bank building, and contents
1936, Citizens National Bank of Bradford formed–
Purchased bank building, and contents
Later Use of DINBs
• The 1935 Banking Act gave the FDIC direct
payoff authority.
• DINBs were not used again until the 1960s.
• In 1964, two DINBs were created after bank
failures in Texas and Virginia.
• A new bank was formed to succeed the Virginia
DINB.
• Two DINBs were created in 1975 in Missouri and
Puerto Rico, but no successor banks were
formed.
Crown Savings Bank Failed in 1964
Receivership
Retained most assets, all uninsured deposits, other claimants,
Subrogated insured deposit claim (FDIC)
DINB
Assumed all insured deposits, bank building, and contents
Bank of Newport formed 2 years later-Purchased the remaining assets of Receivership, assumed the
remaining deposit liabilities of the DINB
The Last Use of the DINB: Penn Square
• Failed in 1982 with $263 million in uninsured deposits
and $207 million in insured deposits.
• Other regulators urged the FDIC to use a P&A or provide
open bank assistance.
• The FDIC favored a payoff as no other cost-effective way
was available to limit losses to the insurance fund.
• At the time, this was the largest payoff in FDIC history:
the agency decided a DINB would be the best method to
pay so many claims.
• The DINB worked well, paying out all but $10 million
within 2 months.
Continental Illinois’ 1984 Failure
Shows Need for Bridge Banks
• Regulators provided liquidity assistance and made a
controversial promise to protect all the bank’s creditors.
• Continental’s complexity, state branching restrictions,
litigation risk, and uncertainty about its assets prevented
the FDIC from finding an acquirer.
• Regulators used a very complex open bank assistance
package that required negotiations with stockholders.
Continental Illinois’ 1984 Failure
Shows Need for Bridge Banks, cont.
• The FDIC covered losses, took control of the bank,
provided capital, and named management.
• The FDIC received junior perpetual preferred stock,
adjustable-rate preferred stock, and stock warrants.
• The FDIC began selling its shares in 1986; return to
private sector was completed in 1991, 7 years after
the resolution.
Lessons from Continental
• Lack of bridge bank authority caused
unnecessary complications and delayed
resolution.
• The blanket guarantee that protected all
creditors would have been unnecessary.
• A bridge could have cut off stockholders
from the bank, eliminating the need for
negotiation.
Lessons from Continental, cont.
• A bridge would have made the complex
open bank assistance agreement
unnecessary.
• Still likely, however, that all non–holding
company creditors would have been
protected.
Attempts to Provide Flexibility: Mid1980s Legislation
• In 1983 the FDIC sought legislative changes to
its DINB authority that would have allowed a
DINB to function as a bridge bank.
• Similar legislation was introduced in 1984 and
1985.
• In 1986, the FDIC first sought separate bridge
bank authority.
• Finally, in 1987, Congress provided bridge bank
authority within the Competitive Equality Banking
Act.
Bridge Bank Authority under CEBA
• The FDIC determined if a bridge bank was “in
the interest of the depositors of the closed bank
and the public.”
• Any number of banks could be placed in a single
bridge bank.
• The FDIC had discretion about which assets and
liabilities were placed in the bridge bank.
• The bridge bank was allowed to operate without
capital; any restrictions based on capital were
waived.
Bridge Bank Authority (continued)
• The FDIC could appoint a board of directors, who
were to elect a chairman and appoint the CEO.
• The FDIC could provide operating funds to the bank.
• The bridge would be terminated upon completion of
a P&A or sale of controlling stock.
• Only banks with $500 million could be sold to out-ofstate bidders unless authorized by state law.
• The bridge bank’s life was limited to 2 years, with a
1-year extension possible, this was modified in 1989
to a 2 year limit with three 1-year extensions.
Bridge Bank Authority (continued)
• Although the bridge has a limited life, there is no
restriction on how long the FDIC can maintain
their stock position.
• By law, the FDIC is not allowed to acquire voting
shares (common stock, or other types of voting
stock) through an assisted transaction.
• The FDIC is allowed to acquire convertible
preferred, warrants, and debt.
• The FDIC can attach bond like covenants to
these instruments that can result in the FDIC
effectively controlling the actions of the bank.
FDIC Use of Bridge Banks: First Republic
• A $33 billion Texas organization formed through merger
in 1987; a bank run forced it to ask for FDIC assistance
in March 1988.
• The FDIC adopted an interim assistance package that
did not create a bridge bank.
• The FDIC provided a $1 billion loan guaranteed by the
holding company and collateralized by the stock of its
subsidiary banks.
• The assistance package specifically excluded holding
company and interbank creditors.
• The FDIC marketed the bank and accepted a bid from
NCNB on July 28.
First Republic (Continued)
• On July 29, the FDIC’s notification that it would not
renew the loan caused the OCC to declare the Dallas
subsidiary bank insolvent.
• This ultimately led the other 40 subsidiaries to be
declared insolvent. The FDIC was appointed receiver.
• The FDIC created a bridge bank, which purchased all
the failed banks’ assets, assumed all deposits and
certain other liabilities.
• This effectively severed the banks from the BHC debt
holders and stockholders
First Republic (Continued)
• The FDIC then contracted with NCNB to manage the
bank pending a final agreement.
• A final agreement was signed in November 1988.
• The FDIC converted the bridge bank to a stock form.
• NCNB bought 20% of shares. The FDIC bought 80%
non-voting Class B common stock.
• NCNB given 5-year option to purchase FDIC’s shares.
• All the bad assets remained with the new bank, with
NCNB managing their liquidation and the FDIC paying
for any losses.
First Republic failed in 1988
1 credit card subsidiary
in Delaware
Receivership
Becomes bridge bank
40 subsidiary banks
40 Receiverships
Bridge bank formed from 40 receiverships
and acquired by NCNB Texas National Bank
Issued stock
Sold to Citibank
Was purchased by NCNB and FDIC
Converted to NCNB Texas Bankcorporation
Lessons from First Republic
• There are two possible reasons why the FDIC didn’t
immediately turn to a bridge bank.
– The authority was new—the FDIC was not used to
employing it as a first step.
– Some of the subsidiaries might have remained
solvent and outside FDIC control without the interim
assistance and collateral guarantee.
Lessons from First Republic, cont.
• Overall, using bridge bank authority
proved much more efficient than open
bank assistance.
• Uninsured bank creditors were still
made whole, but BHC creditors were
not.
MCorp’s 1989 Failure
• MCorp ($18 billion at failure) sought open bank
assistance but was rejected.
• BHC creditors filed bankruptcy petition, forcing
lead bank and 5 affiliates into insolvency.
• Their insolvency brought down 14 other
affiliates. Five affiliates remained solvent and
under the BHC’s control.
MCorp’s 1989 Failure, cont.
• The FDIC formed a bridge bank. For 19 of the
banks, the FDIC passed all assets and the
unsubordinated creditors and depositors to the
bridge.
• Only insured depositors of the 20th bank were
covered, as the bank had large outstanding
judgments.
• The FDIC solicited bids and, in a transaction
similar to First Republic, picked a winner 3
months later.
Lessons from MCorp
• If possible, it is efficient to create a bridge bank
at the beginning of the resolution process.
• The BHC structure allowed MCorp to keep
solvent affiliates and sell them for the benefit of
the BHC rather than their being available to
shield the FDIC from losses.
• This situation caused the FDIC to request cross
guarantee authority be included in a statute
(FIRREA) passed later in 1989.
Bank of New England’s (BNE)
1991 Failure
• When 2 of 3 affiliates failed, a third solvent bank
was seized using the FDIC’s new crossguarantee authority. All 3 banks were
immediately placed in a bridge bank.
• The FDIC, as usual, protected uninsured
depositors and creditors.
• This led to considerable criticism about
disparate treatment of large and small banks.
• These criticisms may have played a role in the
provisions in FDICIA (passed later in 1991) that
restricted the FDIC’s ability to protect uninsured
depositors and creditors.
First City’s 1992 Failure
• Last use of a large bank bridge. First time under
FDICIA least-cost restrictions.
• 2 lead banks declared insolvent in October 1992;
FDIC invoked cross guarantees, rendering the 18
affiliates insolvent.
• FDIC created 20 individual bridge banks and
prepared cost test for each (liquidation vs. operation
and resolution of bridge).
• In 16 banks, all deposits were passed to the bridge
bank. In 4 banks, less costly to pass only insured
deposits to the bridge bank.
First City’s 1992 Failure, cont.
• In a unique resolution, the FDIC marketed
the 20 banks for sale individually or as any
group, accepting the best set of bids.
– 13 of the banks were sold without assistance
– With improvement in the Texas economy, all
uninsured bank creditors, bondholders and
depositors eventually made whole. Even
stockholders received some funds.
First City failed in 1992
20 subsidiary banks
20 receiverships
20 bridge banks created
16 banks,
all deposits transferred
4 banks, only insured
were transferred
20 bridge banks are sold
to 12 different financial institutions
Number that each institution acquired
1 acquired 5
5 acquired 2
6 acquired 1
Lessons from First City
• Demonstrated that the FDIC’s use of resolution
strategies (bridge bank and cross-guarantee)
had matured.
• The failed banks were closed and promptly put
into bridge banks.
• The least cost test helped the FDIC innovate in
its use of bridge banks.
• The resolution structure yielded maximum bids
and a low-cost resolution.
Review of Bridge Bank Authority
• Bridge bank authority was created by the
Competitive Equality Banking Act of 1987.
• A bridge bank is a resolution strategy in which a
temporary bank is established in the case of failure.
• A de novo national bank is chartered by the
Comptroller of the Currency and is controlled by the
FDIC.
• The bank is designed to “bridge” the time between
failure and when the FDIC can effect an acquisition.
• The charter is issued with an initial 2-year term; up
to three 1-year extensions are possible.
Conclusions
• The FDIC’s use of bridge banks evolved significantly from
1987 to 1994.
• The FDIC has found that early bridge formation shortens
resolution.
• Bridge banks help maintain bank operations while a final
resolution is constructed.
• Additional tools, like cross guarantees may be necessary to
reduce costs when failures involve BHCs with many
subsidiary or affiliate banks.
• Resolution of bridge banks can be made to operate efficiently
within FDICIA’s least cost test.
• Bridge bank authority can be adapted both to periods when
lengthy resolutions are anticipated (1987–1991) and to
periods when conditions are improving (e.g. First City in
1992).