As Bangladesh grapples with weak banks plagued by rising non-performing loans (NPLs) and governance failures, the governor of Bangladesh Bank has proposed adopting a bridge bank model to rescue struggling financial institutions.The bridge bank solution comes at a crucial time, as the country’s NPL ratio has reached an alarming level of 9%—among the highest in South Asia. The concept of a "bridge bank" has emerged as a critical tool to address the collapse or instability of weak banks. A bridge bank is a temporary institution created by regulators to take over and manage the assets and liabilities of a failing bank until a permanent solution is found. This mechanism ensures financial stability, protects depositors, and prevents systemic risks from spreading across the economy. As Bangladesh faces challenges with weak banks, the governor of the Bangladesh Bank has proposed adopting a bridge bank model to rescue struggling financial institutions. Operational framework of bridge banks A bridge bank operates as a transitional entity, typically established by a country's central bank or financial regulatory authority. When a bank fails, its viable assets, liabilities and operations are transferred to the bridge bank, while non-performing assets are liquidated or managed separately. The primary objectives of a bridge bank are to maintain financial stability, protect depositors and ensure the continuity of essential banking services. The bridge bank operates for a limited period, during which it restructures the failed bank's operations, improves its financial health and prepares it for sale or merger with a healthier institution. The bridge bank model is particularly effective because it isolates the failing bank's problems, allowing the rest of the financial system to function without disruption. It also provides regulators with the time and flexibility to find a long-term solution, such as a merger or acquisition, without resorting to taxpayer-funded bailouts. Global use of the model The United States has one of the most well-established bridge bank systems, managed by the Federal Deposit Insurance Corporation (FDIC). When a bank fails, the FDIC steps in as the receiver and transfers the bank's assets and deposits to a newly created bridge bank. The bridge bank continues to operate while the FDIC seeks a buyer. A notable example is the collapse of IndyMac Bank in 2008. The FDIC established a bridge bank to manage IndyMac's operations until it was sold to a private investor. This approach minimised disruptions to customers and preserved confidence in the banking system. European Union: Banco Español de Alivio During the European debt crisis, Spain faced significant challenges with its banking sector. To address the collapse of several regional banks, the Spanish government established a bridge bank called Banco Español de Alivio. This entity took over the assets and liabilities of failing banks, restructured their operations,and facilitated their sale to healthier institutions. The bridge bank model played a crucial role in stabilising Spain's financial system and restoring investor confidence. Japan: The Resolution and Collection Corporation Japan's experience with bridge banks dates back to the 1990s during its banking crisis. The Resolution and Collection Corporation (RCC) was established to manage the assets of failed banks and recover NPLs. The RCC successfully resolved numerous bank failures, contributing to the recovery of Japan's financial sector. The Japanese model highlights the importance of a robust legal and regulatory framework to support the bridge bank mechanism. The need for bridge banks in Bangladesh Bangladesh's banking sector has faced significant challenges in recent years, including rising NPLs, weak governance and liquidity shortages. Several banks are on the brink of collapse, threatening the stability of the financial system. In response, the governor of Bangladesh Bank has proposed the establishment of a bridge bank to rescue weak banks and protect depositors. The bridge bank model is particularly relevant for Bangladesh for several reasons. First, it provides a structured approach to resolving bank failures without resorting to bailouts, which can strain public finances. Second, it ensures that depositors' funds are protected, maintaining public confidence in the banking system. Third, it allows for the orderly resolution of non-performing assets, which is critical for restoring the health of the financial sector. Challenges and considerations for implementation While the bridge bank model offers a viable solution, its successful implementation in Bangladesh will require addressing several challenges: Legal and regulatory framework: Bangladesh must establish a robust legal framework to support the creation and operation of bridge banks. This includes defining the roles and responsibilities of regulators, ensuring transparency,and protecting the rights of depositors and creditors. Capital and funding: A bridge bank requires sufficient capital to operate effectively. Bangladesh Bank must ensure that adequate funding is available, either through government support orassistance frominternational financial institutions. Governance and accountability: The success of a bridge bank depends on strong governance and accountability mechanisms. Bangladesh Bank must appoint qualified professionals to manage the bridge bank and ensure that its operations are conducted transparently and efficiently. Public confidence: Restoring public confidence in the banking system is critical. Bangladesh Bank must communicate clearly with the public about the purpose and operations of the bridge bank to prevent panic and ensure stability. The way forward The adoption of a bridge bank model in Bangladesh represents a proactive step toward addressing the challenges in the banking sector. By learning from global examples and tailoring the model to local conditions, Bangladesh can create a resilient financial system capable of withstanding future shocks. The governor of Bangladesh Bank's proposal underscores the importance of innovation and adaptability in financial regulation. As the country moves forward with this initiative, it must prioritise transparency, accountability and public trust. The bridge bank model, if implemented effectively, can serve as a cornerstone for the long-term stability and growth of Bangladesh's banking sector. The bridge bank mechanism offers a proven solution for resolving bank failures and protecting financial stability. Bangladesh has the opportunity to leverage this model to address its banking sector challenges and pave the way for a stronger, more resilient economy. The success of this initiative will depend on the commitment of regulators, the cooperation of stakeholders and the support of the public. With the right approach, Bangladesh can turn its current challenges into a foundation for future prosperity. To ensure the effective management and operation of the bridge bank, Bangladesh Bank should appoint a highly qualified and reputable administrator to oversee its functions. This individual should possess extensive experience in running commercial banks, a proven track record of integrity with no allegations of misconduct,and deep professional expertise in banking operations. By abolishing the existing board and entrusting the bridge bank to such a capable administrator, Bangladesh Bank can ensure transparent, efficient and accountable governance. This step will not only instill confidence among stakeholders but also provide the necessary leadership to navigate the complexities of restructuring and stabilising the troubled financial institution. The administrator’s role will be pivotal in restoring trust, safeguarding depositors' interests and steering the bridge bank toward a sustainable resolution. Dr. Md. Touhidul Alam Khan is a former managing director and CEO of a private commercial bank in Bangladesh. He is also a fellow cost and management accountant.
