Concept and Legal Background of the Bridge Institution
The term bridge institution is used in German law, particularly in financial supervision and banking insolvency law. It describes a credit institution that serves as an interim solution to maintain systemically important banking operations when a bank encounters financial difficulties. Bridge institutions are explicitly regulated by the Recovery and Resolution Act (Sanierungs- und Abwicklungsgesetz, SAG) which in turn contains key provisions for stabilizing the financial system.
Legal Basis and Function of a Bridge Institution
Statutory Regulation
The bridge institution is governed on the basis of Part 4 of the Recovery and Resolution Act (SAG), particularly §§ 109 et seq. SAG. This constitutes a bank resolution measure that can be ordered by the Federal Agency for Financial Market Stabilisation (FMSA) or the resolution authority The purpose of the bridge institution is to ensure the continued operation of essential banking activities for a transitional period.
Purpose and Function
As part of the resolution of a bank, the transfer of business units to a bridge institution can take place in order to continue systemically important banking services, such as payment processing or lending. A bridge institution thus represents a legal entity that either pre-exists or is established specifically for this purpose. It assumes selected assets and liabilities of the original bank, while problematic assets and risks remain with the resolved bank.
Establishment and Legal Form
A bridge institution must always be operated as a legal person. Typically, it is established as a stock corporation (Aktiengesellschaft) or limited liability company (GmbH). The founder in this context is the resolution authority or an institution appointed by it. The establishment and operation of a bridge institution are subject to the requirements of the German Banking Act (Kreditwesengesetz, KWG), particularly regarding licensing obligations and supervisory requirements.
Resolution Mechanisms and Statutory Requirements
Transfer of Assets
In the resolution process, the instrument of business transfer allows the bridge institution to assume parts of the operative business of the bank under resolution. This particularly includes deposits, loans, collateral, and other contractual relationships. The legal basis is § 107 SAG, which governs the transfer of rights and obligations. The transfer does not require the consent of the affected contracting parties and takes direct effect with rem.
Supervision and Control
The Federal Financial Supervisory Authority (BaFin) and the resolution authority are tasked with continuously monitoring the bridge institution. The institution is subject to the same regulations as other credit institutions, especially regarding solvency, capital, and liquidity requirements. The supervision serves to ensure the proper continuation of systemically important banking operations until a permanent solution, such as the sale or wind-down of the assumed business, has been found.
Time Limitation and Termination
Bridge institutions are always conceived as entities of limited duration. According to § 124 SAG, the operation of a bridge institution may last a maximum of two years; in justified exceptional cases, this period can be extended once by up to one further year. Termination occurs through the sale or wind-down of the transferred business. After its objectives have been achieved, the bridge institution is dissolved, with proceeds from the sale flowing into the restructuring fund.
Legal Protection and Liability in the Context of Bridge Institutions
Protection of Owners’ and Creditors’ Rights
The transfer of assets and liabilities as well as company shares to a bridge institution constitutes a significant interference with property rights. For this reason, the SAG provides various protection mechanisms, including a compensation procedure under §§ 99 et seq. SAG. This is used to determine whether shareholders or creditors are worse off as a result of measures taken by the resolution authority than they would have been in insolvency proceedings.
Liability Issues
The bridge institution is liable for the acquired assets and liabilities in accordance with general corporate law and banking supervisory principles. However, there is no joint and several liability for non-transferred liabilities of the former bank. Liability issues in the context of bridge institutions frequently also concern potential breaches of fiduciary duty by management and any losses caused by faulty transfer measures.
Significance within the Resolution Regime under the Single Resolution Mechanism
The bridge institution, as a resolution tool, forms an integral part of the single European bank resolution mechanism (Single Resolution Mechanism, SRM). National and European institutions are involved here to enable, in the event of necessity, the transfer of banking activities to a bridge institution as a measure to maintain financial stability.
Summary
The bridge institution is an important institution under German and European banking supervisory law, which enables the temporary securing and continuation of key business units of systemically important credit institutions facing impending insolvency or serious problems. It is based on the provisions of the SAG, supplemented by the KWG and supervisory regulations. The process provides for numerous protection and control mechanisms to safeguard the rights of owners, creditors, and customers and to ensure the integrity of the financial system.
Sources:
- Recovery and Resolution Act (SAG), in particular §§ 99, 107, 109, 124
- German Banking Act (Kreditwesengesetz, KWG)
- Information from the Federal Agency for Financial Market Stabilisation (FMSA)
- Publications of the Federal Financial Supervisory Authority (BaFin)
- Regulation (EU) No 806/2014 on the Single Resolution Mechanism (SRM Regulation)
Frequently Asked Questions
What legal requirements must be met to establish a bridge institution?
Various legal requirements must be met to establish a bridge institution, which result, in particular, from EU bank resolution law as well as respective national transposing law. The legal basis is Directive 2014/59/EU on establishing a European resolution mechanism (BRRD) and Regulation (EU) No 806/2014 (SRM Regulation) for the single European resolution mechanism. Accordingly, a bridge institution may only be established within the framework of a resolution process, in order to secure the critical functions of an ailing bank on a temporary basis. The establishment is regularly carried out by the competent resolution authority (in Germany: the Federal Agency for Financial Market Stabilisation – FMSA and BaFin), which also transfers assets, rights, and liabilities to the bridge institution. The bridge institution additionally requires a special banking supervisory license, which can be granted under simplified conditions, taking into account the resolution objective and the temporary nature of the institution. Furthermore, it must be ensured legally that the rights of owners or creditors are not unduly impaired by the measure, which is why subordination rules and compensation mechanisms are generally provided. Finally, the bridge institution is subject to the requirements of the KWG (German Banking Act) as well as supervisory rules on remuneration, risk management, and reporting obligations.
For how long may a bridge institution exist by law?
The duration of existence of a bridge institution is legally limited to a temporary period, typically between two and five years. According to § 107 SAG (Recovery and Resolution Act), the bridge institution can exist for a maximum of two years, with the resolution authority able to extend this period two times by up to one additional year each. Further extensions are only permitted if this is essential to achieve the resolution objectives and the European Commission agrees. The main objective is to either sell, liquidate, or merge the bridge institution with another bank after stabilization. If this period is exceeded, the remaining assets must be liquidated and the bridge institution wound down. The temporary nature is expressly anchored in law to prevent misuse and permanent distortion of competition.
What liability issues must be considered when transferring assets to a bridge institution?
The transfer of assets, rights, and liabilities to a bridge institution as part of resolution procedures raises numerous legal liability questions. Under German law, the principle of equal treatment of creditors must be observed (§ 46 KWG, §§ 88 et seq. SAG). A central role is played by the ‘no creditor worse off’ clause, according to which no creditor may be worse off as a result of the measure than they would have been in a standard insolvency procedure. Should a financial disadvantage nevertheless arise, there is a right to compensation from the SRF (Single Resolution Fund) or the national restructuring fund. In addition, existing collateral must be carefully transferred and documented to avoid liability risks. The legal basis for such asset transfers is a statutory transfer process, which usually takes precedence over contractual approval requirements, thus significantly interfering with private autonomy, but is justified by the public interest in maintaining the functioning of the financial system.
Is the bridge institution subject to the provisions of European state aid law?
Yes, bridge institutions are essentially subject to the regulatory provisions of European state aid law. Where state funds or public funds are used or provided during bank resolution—whether directly or indirectly through guarantees or capital injections—these are generally considered state aid within the meaning of Article 107(1) TFEU. Such measures require prior notification and approval by the European Commission. In particular, the bridge institution may only operate on the market for as long and to the extent strictly necessary to preserve financial stability and achieve resolution objectives (principle of minimum aid and temporary nature of aid). The Commission ensures that no distortion of competition occurs, which can, among other things, lead to restrictions relating to the business activities and corporate structure of the bridge institution.
What duties and restrictions apply to the management of a bridge institution?
Special requirements apply to the management board of a bridge institution, arising from banking and resolution law. Before appointment, members of the management board must be checked for personal reliability, professional suitability, and independence (§ 24 KWG, §§ 36, 37 SAG). The managers are obliged to act solely in the public interest and in accordance with the resolution objectives set by the resolution authority. Typical banking supervisory obligations, such as risk management, compliance with the Minimum Requirements for Risk Management (MaRisk), and the Anti-Money Laundering Act, also apply in full to bridge institutions. However, due to the temporary nature of the institution, the scope of activity is restricted: actions associated with a permanent business strategy or expansion are prohibited. In addition, there are reporting obligations to the resolution authority as well as increased monitoring and oversight duties, in order to avoid conflicts of interest and abuse.
What regulatory requirements apply to the capital resources of a bridge institution?
The regulatory requirements for capital resources at a bridge institution are subject to special legal rules and differ from the requirements for regular credit institutions. While minimum requirements under the CRR (Capital Requirements Regulation) and KWG must generally be satisfied for new establishments, the supervisory authority may grant reliefs or exemptions if the bridge institution has been founded solely to safeguard and transfer critical functions and does not seek a permanent market presence. In practice, the bridge institution is often endowed with the minimum capital necessary to maintain operational capability. However, there remain requirements to back risks with regulatory capital and comply with the reporting and disclosure obligations under Articles 430 et seq. CRR. Particular attention is paid to potential capital measures, as these may be treated as potential state aid and be subject to EU state aid law.
Is the bridge institution subject to a special insolvency regime?
The bridge institution is generally subject to general insolvency law, but special resolution law provisions apply during its operation as a resolution instrument, which modify the insolvency regime. Under § 98 SAG, insolvency proceedings over the assets of the bridge institution are excluded during the resolution procedure, in order to ensure stability and functionality. Only once the objectives of the bridge institution are achieved or the defined period has expired does general insolvency law apply again. In this context, the provisions regarding the obligation to file for insolvency and its sanctions are relevant, taking into account the specific features of the resolution process. The special status of the bridge institution serves to protect financial stability and ensures the orderly transfer of critical banking services to new owners or structures.
