Bangladesh's banking sector, once celebrated for its contribution to economic growth, is currently facing a crisis. The sharp increase in non-performing loans (NPLs), severe liquidity issues, and persistent governance scandals have placed several banks on the brink of failure. This precarious situation not only threatens the stability of the financial system but also undermines public trust. In such a challenging environment, the concept of "bridge bank" emerges as a potential solution.

The crucial question is: can "bridge banks" truly rescue Bangladesh's troubled banking sector?

The challenges besetting Bangladesh's financial landscape are serious and widespread. Non-performing loans, often worsened by politically motivated lending practices and inadequate credit management, have reached concerning levels, with the NPL ratio ranking among the highest in South Asia. Many banks are also grappling with significant capital shortages, failing to meet the minimum capital requirements set by regulatory authorities. These financial troubles are aggravated by significant governance issues. Insider lending, a lack of transparency, and high-profile scams have seriously damaged public confidence in the banking system. This creates a harmful cycle: as banks struggle to manage their operations, depositor trust declines, which in turn destabilises the entire financial ecosystem.

This is where "bridge bank" comes into play. This temporary institution is designed to take over the operations of distressed banks, essentially acting as a "financial ambulance" that stabilises these failing entities until a long-term solution—whether it be restructuring, sale, or liquidation—can be achieved. Normally established by central bank or regulatory authorities, a "bridge bank" aims to protect depositors, maintain essential banking services, and reduce systemic risks.

The advantages of "bridge banks" for Bangladesh is significant. By stepping in to manage troubled banks, it can prevent sudden collapses, ensuring that customers continue to have access to their funds and banking services. This continuity helps maintain public confidence during turbulent times. Additionally, a "bridge bank" can safeguard depositors' funds during crises, reducing the risk of panic withdrawals and bank runs. It also creates necessary time and framework for restructuring distressed banks, including recapitalisation, governance improvements, and management of non-performing assets. Most importantly, by isolating failing banks from the broader financial system, a "bridge bank" can prevent the crises from spreading to healthier institutions, thereby protecting the overall banking sector.

However, the introduction of a "bridge bank" in Bangladesh presents a distinct set of challenges. A strong legal and regulatory framework is vital for ensuring successful outcomes. While the proposed "Bank Resolution Ordinance" is a positive step forward, it requires transparent execution free from political interference to be effective. Setting up and managing a "bridge bank" needs considerable financial resources, meaning they will require backing from the government, international institutions, and contributions from other banks.

Good governance and transparency in managing a "bridge bank" is also crucial. Without proper oversight, there is a risk of mismanagement or misuse of resources, which could further erode public trust. Moreover, there is the moral hazard; banks may adopt reckless behaviour, believing that they will be shielded by a "bridge bank". This highlights the necessity for stringent regulatory oversight.

Globally, the "bridge bank" model has proven effective in addressing banking crises. During the 2008 financial crisis in the United States, for instance, the Federal Deposit Insurance Corporation employed a "bridge bank" to manage failing institutions like IndyMac Bank, ensuring the continuity of services and protection for depositors. Similar results have been observed in countries like Portugal, Italy, and India, where "bridge banks" played a key role in stabilising troubled banks and restoring public confidence in the financial system.

While a "bridge bank" may not be the panacea for all the issues facing Bangladesh's banking sector, it presents a promising avenue for addressing its challenges.

The author is a former managing director and CEO of a first-generation private bank in Bangladesh.