Bridge Bank Schemes in the Asian Region Past Experiences and Perspectives

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

Bridge Bank Schemes in the Asian RegionPast Experiences and Perspectives

Bridge Bank Schemes in the Asian RegionPast Experiences and Perspectives

The Research Subcommittee of

Asia Regional Committee

International Association of Deposit Insurers

Presenter: Mutsuo Hatano, Deputy Governor Deposit Insurance Corporation of Japan

The Research Subcommittee of

Asia Regional Committee

International Association of Deposit Insurers

Presenter: Mutsuo Hatano, Deputy Governor Deposit Insurance Corporation of Japan

2International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

Contents

I. Introduction

II. What is a Bridge Bank? : Definition and US Bridge BankA. Definition and Basic DesignB. Origin and Background: US Bridge BankC. Significance

III. Cases in the Asian RegionA. KoreaB. TaiwanC. Japan

IV. Conclusion


I. Introduction

”Bridge Bank” is a viable alternative for deposit insurers Because it

gives the deposit insurers the strategic flexibility; helps preserving the business value of a failed bank; and maintains the convenience of its customers

Meanwhile the Asian region is “young” But we have already had some precious experiences of Korea, Taiwan and Japan

in this region.

Then Asia Regional Committee (ARC) set up a project team in its Research Subcommittee develop a research paper,

“Bridge Bank Schemes in the Asian Region; Past Experiences and Perspectives,”

to share those experience and knowledge.


II. What is a Bridge Bank? A. Definition and Basic Design

• The bridge bank is a “temporary bank established and operated to acquire the assets and assume the liabilities of a failed institution until final resolution can be accomplished (IADI Glossary).”

• The bridge bank is designed to preserve or prevent deterioration of the value of a failed bank.

• The bridge bank provides time allowance to deposit insurance authority for the final decision of resolution strategy.


II. What is a Bridge Bank?B. Origin and Background

• The term “bridge bank” was originated in the United States with the Competitive Equality Banking Act (CEBA) in 1987.

• The FDIC was authorized to establish bridge banks by CEBA and it firstly established a bridge bank in October 1987.

• The FDIC executed its bridge bank power 10 times to solve 114 failed banks with $89.9 billion in total asset through 32 bridge banks between 1987 and 1994.


II. What is a Bridge Bank?C. Significance

The bridge bank is designed to contribute the financial stability eventually

• The most common acknowledgement must be it would produce time allowance for the better resolution of failed banks.

• Also the early bridge formation can avoid unnecessary complications and delayed resolution (It may shorten a bank resolution process).

• It helps maintaining bank operations while a final resolution strategy is determined and contribute to keep its value of failed bank’s business.


II. What is a Bridge Bank?C. Significance

However it should be noted that there are concerns on

• Negative publicity to the public • Cost overrun from original estimate • Possible reduction of the deposit base (reducing the

institution’s franchise value)


III. Cases in the Asian Region


III. Cases in the Asian RegionKorea/ Current Specification

• a) Objectives and its Establishment• To protect depositors and maintain the stability of the financial system

• b) Legal framework• Banking Act/Mutual Savings Act• Depositor Protection Act /Financial Restructuring Act

• c) Governance and Organization• The KDIC and FSS (Financial Supervisory Service) supervise the bridge bank. • The president, directors, and auditor shall be appointed by the KDIC. • The bridge bank is a quasi-subsidiary of the KDIC


III. Cases in the Asian RegionKorea/ Current Specification

• d) Business Transfer• Although there is no time limit, the appraisal may take 1 or 2 months and a

bridge bank assumes operations on the date of transfer for assets and liabilities.• A bridge bank assumes sound assets whose quality is same or better than

precautionary • The only liabilities normally assumed are protected deposits

• e) Operations• The bridge bank shall carry out the payment of claims (deposits) and collection

of claims (loans) • The existing employees of a failed bank operate the business. • The KDIC may provide funds necessary for the operation.

• f) Termination of Bridge Bank• The business period is up to 3 years (plus 1-year possible extension). • The KDIC shall dissolve a bridge bank in case of a termination of business

period of the bridge bank, merger, or transfer or taking over of business


III. Cases in the Asian Region Korea/ Past Experience

Yegaram Mutual Savings BankKorea’s first bridge bank in 2005

• Bridge bank for two mutual savings banks to be resolved, Arim Mutual Savings Bank and Hanjung Mutual Savings Bank

• Limited resource for additional bank resolution at that time constrained the KDIC to establish the bridge bank “to minimize depositors' inconvenience due to business suspension and to promptly deal with the additional savings banks.”

• The KDIC invited an expert from outside as an executive officer to enhance the corporate value of the bridge bank. The independent management of the bridge bank was entrusted to maximize its corporate value and develop new profit models.

• The KDIC played the role of a supervisor and custodian. • It was conducted under the limited coverage system and the least cost principle.


III. Cases in the Asian Region Korea/ Perspectives

Merit: From the Past Experience in Korea• The bridge bank minimized the impact on the real economy through continuous

provision of financial services.• It also eased the burden of selling multiple savings banks at the same time and

maintained the value of the companies as an on-going concern.

Apprehension: Forbearance risk etc.• Neglect of Least Cost Principle• Conservation of a bank without competitiveness• Harm of fair competition in term of creating a bank support by the government

agency, namely the KDIC.


III. Cases in the Asian RegionTaiwan/ Current Specification

• a) Objectives and its Establishment• To manage systemic crisis and maintain the financial stability.

• b) Legal framework• Deposit Insurance Act• Banking laws

• c) Governance and Organization• The competent authority, FSC and CDIC supervise the bridge bank. • The board shall be composed of five (5) to nine (9) people with one of which

being the chairman. • The appointment of the chairman of the board, the directors and the supervisor

shall be done by the CDIC.• The entire related requirement is under drafting by CDIC and subject to the

approval by the FSC.


III. Cases in the Asian RegionTaiwan/ Current Specification

• d) Business Transfer• The bridge bank assumes all or part of the businesses, assets and liabilities of

the failed bank. In principle, the bridge bank assumes all the asset of failed bank except the Non-performing loans, written-off loans etc.

• Basically, all the liability of failed bank can be assumed.

• e) Operations• The bridge bank succeeds banking operations of a failed bank• CDIC can hire employees under contractual basis from the failed bank, or other

commercial banks, and the bridge bank covers those expenses.• CDIC may offer working capital to bridge bank if necessary

• f) Termination of Bridge Bank• Duration of a bridge bank is limited to 2 years (possible 1-year extension). • In the case of no acquirer appears within the time limit, the creditors of the

bridge bank will be reimbursed and the liquidation proceeds will be applied for the remaining assets and liabilities.

• After the liquidation proceeds are finished, the CDIC will assume the loss if there is any.


III. Cases in the Asian Region Taiwan/ Past Experience

Conservatorship of CDIC Taiwan • Even though CDIC could adopt the “bridge bank” scheme it has no experience

in establishing a bridge bank.

• The competent authority in Taiwan tended not to close any failing bank because of the possible high social cost to resolve the failing banks.

• Then CDIC became a conservator and played a bridge-bank-like-role during the period of its conservatorship in the past.

• CDIC did not own a failing bank nor set up a temporary assuming institution. But CDIC was responsible for the banks’ operations and tried to auction off the failing bank under the name of the failing banks until it sold the banks.


III. Cases in the Asian Region Taiwan/ Perspectives

Handling Systemic Crisis• The bridge bank would be established when there is potential risk of a systemic

crisis during the period of its conservatorship. • The mechanism will be lined up as an equipment to help in maintaining the

credit order and financial stability.• It should first consider the methods like P&A or prompt corrective action for

bank resolution rather than establishing a bridge bank.

Costly Choice and Alert• A bridge bank in Taiwan could be a costly choice as it is a tool of handling the

systemic crisis. • Moreover, it should be noted that a bridge bank may not be the best way to

presume the value of a failed bank due to its restriction of the business scopes and condition.


III. Cases in the Asian Region Japan/ Current Specification

• a) Objectives and its Establishment• To take over the operations of a failed bank and to temporarily maintain its

operations. • The DICJ shall become the promoter for the establishment of a bridge bank that

is a subsidiary of the DICJ

• b) Legal framework• Deposit Insurance law/ Banking Law

• c) Governance and Organization• The DICJ shall prepare guidelines in order to manage the business of a bridge

bank to ensure the proper performance. And the guidelines are is subject to the approval by the Prime Minister.

• The bridge bank must have three (3) executive directors and three (3) auditors (including one or more standing auditor(s) and one or more outside auditor(s)) in line with the Commercial Law.


III. Cases in the Asian Region Japan/ Current Specification

• d) Business Transfer• In general, a bridge bank assumes only good assets and liabilities.• The financial administrator of a failed bank shall determine the assets to be

assumed by a bridge bank with the confirmation by the Commissioner of the FSA.

• e) Operations• A bridge bank assumes the overall business operations of a failed bank and

continue to function as it used to be. • The DICJ as a sole promoter of a bridge bank will appoint the executive

management. • A bridge bank mainly consists of the employees of a failed bank. • The DICJ may with the resolution of the Policy Board, issue loans or guarantees

of financial obligations.

• f) Termination of Bridge Bank• The term is limited to 2 years (possible 1-year extension).• When a bridge bank incurs a loss, the DICJ may compensate losses.


III. Cases in the Asian Region Japan/ Past Experience

BBJ: Bridge Bank of Japan

• The first bridge bank was established in March 2002 for the failure of Ishikawa Bank and Chubu Bank.

• The Japanese deposit insurance system, at that time, was about to move back to limited coverage system after the temporary measures of blanket guarantee.

• It was required by law to determine the acquirers by the end of March for those two banks which failed during the period of the blanket guarantee in order to be applied the full coverage measures; however, the Japanese financial powers found it extremely difficult to seek acquirers for such a short period.

• Accordingly the bridge bank was established to assume those two failed banks.

• However, the bridge bank did not do any business operation of failed bank because the acquirers of those two failed banks appeared earlier than expected.

• But it accepted the assets and liability once then forwarded them to the final acquirers on the same date because the bridge bank, at that time, cannot cancel its contact with the failed bank.


III. Cases in the Asian Region Japan/ Perspectives

Time Constrain under the Bankruptcy Laws and • Time constrain has become more severe in the bank resolution procedure under

the limited coverage in Japan. • Under the limited coverage system, the bank resolution will be executed in line

with the Bankruptcy Laws, which requires quick solution of corporate rehabilitation including finding acquirers for failed banks.

• The bridge bank is supposed to be an indispensable component to meet the requirement.

SBBJ: Second Bridge Bank of Japan• In order to meet the time constraint stated above, the second bridge bank the

Second Bridge Bank of Japan (SBBJ) has been already established simultaneously with the termination of the first bridge bank in March 2004.

• SBBJ has dealt with no bank failure so far and is providing for the potential bank failure in the future.


IV. Conclusion

Useful Tool in Bank Resolution• Overall, the bridge bank system is a useful tool for a deposit insurer who is

entrusted or involved in bank resolution process.

• It can add flexibility to bank resolution options to deposit authority.

• It can be employed as a part of deposit insurance system in the Asian region.

But We Need Further discussion on • A firm legal provision in order to make the mechanism work correctly

• Issues of Least Cost Test

• How to “market” the bridge bank and to sell at the better price

Bridge Bank Schemes in the Asian Region Past Experiences and Perspectives

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