The Silicon Valley Bank ceased to exist when it was declared bankrupt after a bank run. At this point in time, the regulators stepped in, took control of the bank’s assets and liabilities, and appointed the Federal Deposit Insurance Commission (FDIC) as the receiver of the assets and liabilities. Then later, these same assets and liabilities were transferred by the FDIC to a bridge bank.

It needs to be understood that this bridge bank is a separate legal entity as compared to the FDIC and the Silicon Valley Bank. The creation of a new entity that temporarily operates the bank has many implications.

In this article, we will have a closer look at what a bridge bank is and what is the role of such a bank in the Silicon Valley Bank fiasco.

What is a Bridge Bank?

When bank failures happen, the existing bank stops functioning almost immediately. However, it generally takes some time to find a buyer for the assets and liabilities of such banks. Hence, there is a need for an institution that can act as a bridge between the failed bank and the new owners of the bank.

As the name suggests, the bridge bank only acts as a temporary owner of the bank till the FDIC is able to decide on who the next owner of the bank’s assets and liabilities should be. In the absence of a bridge bank, it is possible that customers may simply stop paying the loans which are due to the bank. Hence, the failure of the bank may end up turning perfectly good assets into non-performing assets! A bridge bank can help avoid such a situation and hence it was necessary in the case of Silicon Valley Bank.

A bridge bank is a legal tool that is created based on the Competitive Equality Banking Act of 1987. This bank gives the power to the regulators and the FDIC to charter a new bank.

It needs to be understood that the bridge bank has almost all the powers of a full-fledged national bank. In the case of Silicon Valley Bank, it has been provided control of all the assets and liabilities of the original bank.

The purpose of this bridge bank is to ensure that the banking system is able to honor all the commitments which have been made to creditworthy customers. There are certain limitations placed on the actions of the bridge bank. For instance, the bridge bank cannot start calling in all long-term loans which the bank had made if the repayment is happening as per the schedule and there is enough collateral available to secure the loans.

Benefits of Bridge Bank

The FDIC has ordered the creation of the bridge bank after the Silicon Valley Bank failure since there are several benefits to the process. Some of the important ones have been listed below:

1. Minimize Disruption: The fall of the Silicon Valley Bank had the potential to cause massive disruption. The funds of the depositors could have been frozen. Also, the loans being paid by the customers could have stopped. There was also a likelihood that the payments being executed by the bank would not be executed correctly. All these events could have caused a complete breakdown of banking services for the customers of Silicon Valley Bank. This would have dented the customers of other corporations in the banking system as a whole.

   Hence, a bridge bank has been created so that the bankrupt bank can operate as a going concern till a suitable buyer has been found. The creation of a bridge bank along with the announcement that depositors can also access their uninsured deposits has created a situation wherein the operations of Silicon Valley Bank can literally be conducted as if nothing has happened even though bankruptcy has taken place!

2. Ability to Increase Recoverable Amount: After the declaration of the bankruptcy of Silicon Valley Bank was made, the FDIC started finding different suitors for the assets and liabilities of the bank. However, in the absence of a bridge bank, the situation would be completely chaotic. This chaos would force the FDIC to quickly wrap up its process of finding a new buyer.

   If the FDIC is in a rush, it is possible that the bidding banks will form a cartel and try to obtain the assets at a fraction of their true value. It is important for the buyers to realize that the assets being sold are not under any immediate distress. Instead, the operations of the failed bank can continue unabated for a long time. This will allow the FDIC to have significant bargaining power with prospective buyers. The end result will be that the FDIC may be able to increase the recoverable amount. This is also the case with Silicon Valley Bank wherein the operations are continuing unabated.

3. Dealing With Vendors: It is also possible that all the vendors stop providing services to the failed bank once the news of its bankruptcy spreads. One of the purposes of having a bridge bank is to provide the bank’s management with an opportunity to close their relationships with the vendors in an orderly manner. This includes vendors of physical goods and services as well as technological goods and services.

How Does the Bridge Bank Process End?

The bridge bank comes into existence by the creation of a charter i.e. by the process of law. Hence, the end of the bridge bank should also happen via a legal process.

In most cases, the bridge bank ceases to exist once the majority of the shares of the failed bank have been transferred by the FDIC to another bank. The process is automatic and follows the legal provisions which have been mentioned in the Competitive Equality Banking Act of 1987.