CRS Summarizes Legal History of FDIC Bridge Banks
Commentary by Sebastian Souchet
CRS reviewed (i) the legal development of bridge banks, (ii) how bridge banks currently operate, and (iii) areas for potential legislative and regulatory reform.
CRS explained that the FDIC's bridge banks are temporary national banks established to serve the needs of the customers of failed banks, while the FDIC either locates buyers for the failed banks or proceeds with a bank liquidation. CRS said that bridge banks allow the FDIC to continue banking operations after the transfer of assets from failed banks; the bridge bank can then be used to complete contractual obligations and service customers. CRS said that bridge banks cease operations by the earlier of (i) the passage of two years after the formation of the bridge bank or (ii) the sale of the stock of a bridge bank to another entity, or the assumption of substantially all the deposits and other liabilities of the bridge bank by a non-bridge bank. CRS noted that the FDIC can also extend a bridge bank’s status for three additional one-year periods.
CRS identified possible legislative and regulatory reforms that Congress might consider to enhance the FDIC's ability to create and administer bridge banks. Potential reforms include amending the Federal Deposit Insurance Act Section 13 ("Corporation Monies"), and/or related FDIC regulation, as to (i) the "least-cost-resolution requirement" for bridge banks, or (ii) the FDIC's conduct as a conservator or receiver.
Commentary
While not specifically mentioned in the CRS report, it is notable that for purposes of certain provisions of the FDIA, the FDIC does not have the same rights in its capacity as administrator of a bridge bank that it does when it acts in a receivership capacity.
A bridge bank, for purposes of a number of provisions under the FDIA, is effectively not considered a failed bank subject to receivership. Thus, neither the FDIC’s general receivership powers, nor the 90-day stay that applies to agreements that are in FDIC receivership, should be relevant to contracts that have been transferred to a bridge bank. Furthermore, a bridge bank may not prevent a party from exercising its contractual rights, and does not have the FDIC’s receivership right to disaffirm or repudiate contracts. Simultaneously, because a bridge bank also assumes any assets and claims transferred from a failed bank, it may enforce any contractual remedies of the failed bank that are relatedly transferred.
There are also a number of statutory and regulatory exceptions from the FDIA’s receivership provisions in the case of qualified financial contracts that address the transfer of such contracts to a bridge bank.
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