Philippine Deposit Insurance Corp. (PDIC) has stepped up efforts to secure authority for “bridge banking” as a way to provide relief for troubled banks.

A bridge bank is a temporary institution established and operated by the receiver of a closed bank or the PDIC to acquire the assets and assume the liabilities of the troubled bank.

This system will make it possible for a bank that has been padlocked by regulators on a Friday to reopen the following Monday under the care of PDIC.

The bridge bank will have the “good assets” and insured deposits of the failed institution. The “bad assets” and uninsured deposits will remain with the receiver for liquidation.

“This will protect depositors of a failed bank by ensuring that there will be no disruption in banking services,” PDIC president Jose Nograles said in a statement. “Hence, [it will] maintain depositor confidence in the Philippines.”

He added that a bridge bank would “provide allowance in terms of time for a better and well-planned final resolution of a failed bank.”

He added that this resolution method would be “less costly” to the deposit insurer because it would not require outright payout to depositors and liquidation of the remaining assets of the failed bank.

According to the proposed concept, the bridge bank will operate for a limited period, during which a suitable resolution will be identified. This may be in the form of sale to a new investor, purchase and assumption or mergers and consolidation. If no resolution is reached within the prescribed period, the bridge bank will be liquidated.

“A bridge bank preserves the franchise value of a failed institution prior to its sale to a new investor, its purchase and assumption or merger and consolidation,” Nograles said.

Bridge banking is an international best practice adopted by deposit insurance systems in different countries.

The PDIC has proposed bridge banking as part of amendments to its charter. With editing by INQUIRER.net