The Bangladesh Bank will be able to sell or liquidate weak banks by forming bridge banks—financial institutions that temporarily take over a failed bank, according to the draft Bank Resolution Ordinance.

Finalised by the Bangladesh Bank (BB), the draft was recently published on the Financial Institutions Division website of the Finance Ministry for public consultation.

Bridge banks are designed to ensure seamless banking services while providing time to find a buyer for the troubled institution. They play a crucial role in maintaining uninterrupted banking operations during the resolution process.

Additionally, bridge banks act as isolators, separating distressed banks from the broader sector and absorbing them to prevent panic withdrawals or bank runs.

Under the proposed legislation, the BB will have the authority to establish one or more bridge banks to run the critical and viable functions of distressed banks.

These bridge banks will ensure the continuity of essential banking services while addressing the financial instability of failing institutions.

According to the draft, the central bank will have the power to appoint temporary administrators to manage failing banks. These administrators will operate under the BB's directives to stabilise weak banks and implement necessary recovery measures.

Furthermore, the BB will be able to raise capital through new or existing shareholders to strengthen the financial position of distressed banks.

The proposed legislation also enables the BB to transfer shares, assets, and liabilities to third parties without requiring shareholder consent.

This is meant to facilitate swift resolutions and prevent prolonged disruptions in the banking sector.

The central bank will create a dedicated department to manage the resolution of scheduled banks so that these functions remain outside of its regulatory and supervisory roles.

A "Bank Restructuring and Resolution Fund" will also be formed to finance interventions, backed by government contributions, international financial institutions, and risk-based levies on banks.

A core focus of the draft ordinance is depositor protection, as it seeks to prevent abuses of bank resources by prohibiting insider transactions, unauthorised write-offs of interest for influential borrowers, and artificial inflation of profits.

According to the draft, the BB will be able to restrict shareholders of troubled banks from transferring or disposing of shares. This would help ensure accountability for those responsible for a bank's failure.

In cases where banks fail to meet capital or liquidity requirements or engage in fraudulent activities that risk their financial health, the BB will be authorised to take immediate corrective action.

If approved by the President, the Bank Resolution Ordinance will enhance the central bank's ability to stabilise the financial sector, protect depositors, and ensure the smooth resolution of non-viable banks.