Summary of the power
When a member institution is non-viable in the opinion of the Superintendent of Financial Institutions, CDIC can establish a bridge bank for a temporary period. In such cases, CDIC must transfer all insured deposits and can transfer other assets and liabilities of the failing institution to the bridge bank to contribute to the bridge bank’s viability or preserve financial stability. Other assets and liabilities, including “bad” assets that are not critical and certain liabilities such as subordinated debt, can be left behind in the failed institution for liquidation.
The key objectives of a bridge bank are to maintain critical services and continuity of operations that are important for financial stability. This would minimize the disruption to the financial system that might otherwise occur if those functions were subject to wind-up and liquidation procedures.
Pre-conditions for bridge bank
The pre-conditions to the Bridge Bank resolution tool are:
- The Superintendent of Financial Institutions forms a non-viability opinion and reports to CDIC’s Board.
- CDIC’s Board reviews options and recommends the best resolution approach for the failing bank to the Minister of Finance.
- The Minister of Finance recommends a resolution approach to the Governor in Council (GIC) – the federal Cabinet.
- The GIC makes an order authorizing the resolution approach.
The GIC makes an order authorizing the resolution approach. In a bridge bank resolution, the GIC would appoint CDIC as receiver of the failed institution. In its order, the GIC would specify when the deposit liabilities are assumed by the bridge bank.
In addition to considerations of financial stability and confidence in the financial system, CDIC would also look to other factors like execution risks, costs, exposure to and size of the loss, when pursuing this tool as an option, as well as:
- when it is determined undesirable by the CDIC Board, the Minister of Finance and the GIC to allow the member to be closed;
- to ensure continuity of service;
- for institutions with attractive franchises where a bridge bank can preserve or enhance value; and
- when an institution fails on short notice.
A bridge bank resolution would be designed to span the time between when the institution has failed and when a sale of the bridge bank or its assets can be completed. Unlike the conventional forced sale tool, a bridge bank may be used when there are no immediate private sector acquirers.
The bridge bank model would be especially suited for member institutions that deteriorate rapidly with little notice and where a potential buyer does not emerge and there are financial stability concerns. This would promote stabilization for depositors and all creditors that are passed to a bridge bank.
Operations of the bridge bank
The following illustrates how a bridge bank scenario would likely unfold:
- CDIC would be appointed as receiver of the failed institution
- the Minister would be directed to incorporate a bridge bank
- the letters patent incorporating the bridge bank would be made on a Friday night after the close of the Large Value Transfer System clearing cycle.
The bridge bank, which would be a new legal entity wholly owned by CDIC, would be authorized by the Superintendent to commence and carry on business immediately on Friday.
As the receiver of the failed institution, CDIC would decide which assets and liabilities should be passed to the bridge bank. This would include all insured deposits at a minimum. All creditors that would be passed to the bridge bank would receive full and uninterrupted access to their funds.
A bridge bank would be a ‘good bank’, leaving the stub of the failing member institution to function as the ‘bad bank’ for assets not acquired by the bridge bank. This ‘bad bank’ would be liquidated in a court-supervised process. Creditors left behind in liquidation would start to receive their shares of recoveries as assets are liquidated.
CDIC could decide to only transfer the assets and liabilities necessary to preserve essential services, or could transfer all assets and liabilities to keep the institution whole.
Once CDIC has substantially transferred the assets and liabilities to a bridge bank, the Corporation would apply for a winding-up order of the failed institution under the Winding-up and Restructuring Act.
CDIC would provide the financial assistance that the bridge bank needs in order to discharge its obligations. CDIC can draw from its investment portfolio and exercise its borrowing authority under the CDIC Act. Additional borrowings, if needed, can be authorized by Parliament through an appropriations act.
CDIC has the authority to issue directions to the board of directors of the bridge bank. CDIC may remove and replace the failing institution’s board of directors (and indirectly, senior management) when implementing a bridge bank.
The GIC may exempt a bridge institution from the application of any provision of the Bank Act or certain other statutes.
The bridge bank is not to be viewed as a ‘competitor’ to other banks. The goal would be to return the bridge bank to the private sector through one or more transactions (e.g., a sale of the bridge bank to a third party or an amalgamation with another bank) as soon as possible. It is expected that the pricing of loans and deposits at the bridge bank and various fees would be roughly equivalent to industry norms.
A bridge bank can be in existence for up to two years with the possibility of extensions by the GIC, which can grant up to three extensions of one-year each. This could lead to a bridge bank being in existence for up to five years. The time period as a bridge bank would allow for “cleaning-up” and marketing the institution as well as for prospective acquirers to conduct due diligence. After the end of the relevant time period, the bank would cease to be designated as a bridge bank.
When an order is made to establish a bridge bank, the CDIC Act imposes a general stay of proceedings which overrides contractual rights subject to Canadian law. These are consistent with protections of receivers and trustees in bankruptcy under insolvency legislation. The stays exist to allow sufficient time to stabilize the situation and set up the bridge bank. Generally speaking and subject to certain exceptions related to obligations as a member in Payments Canada and eligible financial contracts (or EFCs), all legal proceedings, general contract termination or enforcement rights are temporarily stayed in a bridge bank scenario.
a) Share Sale / Recapitalization: Shares of the bridge bank could be sold to a third party purchaser who would inject additional capital, subject to Ministerial approval and ownership concentration issues being addressed.
b) Purchase and Assumption: The assets / liabilities of the bridge bank could be transferred to / assumed by one or more purchasers.
c) Amalgamation: The bridge bank could be amalgamated with another institution subject to Ministerial approval and provided ownership concentration issues are addressed.