By Nick Brown

July 14 (Reuters) - Puerto Rico's financial oversight board late on Friday approved a plan to wind down the island's Government Development Bank (GDB), bringing the defunct fiscal agent a step closer to settling more than $5 billion in debt.

The oversight board, appointed by federal lawmakers to steer Puerto Rico through a historic crisis, said in a joint statement with government leaders it endorsed the plan to restructure GDB debts under Title VI of PROMESA, a federal Puerto Rico rescue law passed by the U.S. Congress last year.

GDB officials lauded the deal, which will split GDB's assets among depositors and lenders in an effort to avoid a protracted bankruptcy.

"Today's development represents an important step forward in the restructuring of GDB," Christian Sobrino, the bank's president, said in the joint statement. "It also represents significant progress in Puerto Rico’s economic recovery."

Once the primary fiscal agent for Puerto Rico, in charge of holding deposits from government agencies and municipalities, GDB has been a shell entity since the U.S. territory's former governor declared a state of emergency in April 2016.

Its wind-down could mean losses of as much as 45 percent for some bondholders.

The bank's plight is a microcosm of broader strife on the island, which in May filed the largest bankruptcy in U.S. municipal history. It has nearly $72 billion in debt and a $50 billion pension gap, to go along with a 45 percent poverty rate and near-insolvent public health systems.

GDB's liquidation is not a done deal. Creditors must now vote on the plan, though the bank announced in June it had secured support from a majority of stakeholders.

A federal court would then need to approve the deal under PROMESA and Puerto Rican lawmakers would have to pass legislation effecting the deal.

The plan would split the bank's assets between two entities.

The first, holding $5.3 billion in GDB assets, would issue three tranches of debt with different protections in exchange for varying principal reductions. Beneficiaries would include municipal depositors and bondholders like Avenue Capital Management, Brigade Capital Management, and Fir Tree Partners.

The second entity, funded with public entity loans and $50 million in cash, would benefit all other depositors.

(Reporting by Nick Brown in New York; Editing by Daniel Bases and Lisa Shumaker)