SVB customers who lost their deposits remain on the hook for loans

Maybe I can put it in a way that will seem fair (or at least necessary for banking to function; or at least the closest approximation of fairness).

Let's say that you deposit money with me and I tell you "if my house burns down, you won't get the money I'm holding in the house back." You agree. I lend you money and you say, "if my business fails, I won't repay the loan." I agree. My house burns down, but your business is doing fine. According to the terms that we both agreed to, you still need to pay me back the loan.

Let's say that you deposit the money with me and we say that if my house burns down, you don't have to pay back any loans to me. I refuse to lend you money because of that clause. You borrow money from Frank, my house burns down, and you're back in the same position.

Should people who had deposits wiped out, but had borrowed from other companies receive debt forgiveness? Should Frank be required to forgive your debt even though he had nothing to do with the failure of my bank?

If it worked the way you propose, banks would never lend money to people whose deposits they held (unless those deposits were externally insured). You'd deposit at SVB and have to get loans from another bank since SVB wouldn't lend to you as a depositor-customer.

When you take on a debt, you're saying you can pay that debt even with all the risks that exist in the world (including the risk that uninsured deposits might disappear). You're agreeing that if you can't pay the debt, that's your fault. We have processes like bankruptcy when people and companies can't pay their debts.

I think I'd update your quote to be "hey we went bankrupt so we don't have your money, but we still expect you to pay us back unless you're willing to declare bankruptcy yourself." I think that's a key change and highlights what they don't want to do. These VCs, private equity, and wealthy elites don't want to declare bankruptcy. They looked at the risks, accepted the risks, and now they're annoyed that the risks went against them. Most likely, they can all pay back those loans. They just don't want to since they took a big loss on their uninsured accounts.

Companies don't declare bankruptcy and wipe out their owners for fun. SVB's shareholders lost everything, over $40B. This isn't a fun technicality where the bank gets a happy ending on the backs of its depositors.

I'd also note that these depositors may not have lost their money. They're simply unsecured creditors. If the bank's assets can cover their deposits, they'll eventually get their money back (or a portion of it).

I think the key thing is that the act of taking the loan must be treated independently of the act of depositing money. When taking the loan, one must assess the risk involved. With an FDIC insured account, you can be pretty assured that you can repay the loan based on deposited funds. With an uninsured account, you know you are taking the risk that the deposited funds might not be there. That makes it seem fair to me. The alternative is that banks simply wouldn't lend money to their depositors since they'd have more rights on the loans of non-depositors.

It's fair, to me, because taking out a loan means accepting the risk that you might lose your job, your deposits might change within the regulatory framework on those accounts, etc. They accepted the risk that their deposits wouldn't be around to pay the loan - just as they would have if they'd taken the loan from HSBC while depositing at SVB. The decision to accept the risk of uninsured deposit account was the depositor's choice. Now the bank also accepted the risk that the borrower might default and declare bankruptcy just as the depositor accepted the risk that the bank might go under and their deposit would be lost. Then the issue becomes that the borrowers don't want to declare bankruptcy having accepted all the risks involved. They'd rather whine that they don't like how the risks they took turned out and hope someone else will cover the cost of those risks for them.

But it's also somewhat essential to the banking system. Let's say I run a bank and there's no deposit insurance for 2 people. Bob has deposited $500 and has a loan for $10,000. Susan has deposited $10,000 and has a loan for $500. Someone tries to withdraw and I have a bank run and everyone's accounts are wiped out - pending the unwinding of the bank's loans. If we just said "ok, all the deposits are wiped out, but we'll wipe out the loans too," then Bob gains $9,500 while Susan loses $9,500. That's certainly not fair. Let's say that the unwinding process can only get people back to 90% because the loans won't cover all the deposits. It's still a lot closer to fair for Bob to repay $9,500 and get $450 in deposits (losing $50) and Susan repays $500 and gets $9,000 in deposits. That's a lot more fair than simply telling Susan that she should have borrowed and giving Bob a big pay day.

In a sense, you're right that it isn't fair. However, it's probably the closest approximation of fairness. What would be fair is being able to wind back time and re-do things so that SVB didn't do the things that led to its collapse. However, when you find yourself in a situation where you owe more than exists, you only get to approximate fairness. There is no truly fair outcome. The fair outcome is that they'd have all their deposits back. The approximation is that they'll get their deposits back based on how much is actually left to give them. Simply wiping out their loans would mean redistributing wealth randomly from depositors to borrowers - a vastly less fair outcome. Letting someone who deposited $5 and borrowed $5M out of their debt would be unfair to someone who deposited $5M and borrowed nothing. If they don't have to repay the loans, it changes the funds available to repay the depositors and that would be unfair to those who deposited more than they borrowed.

Again, bankruptcy is never quite "fair". Maybe bankruptcy should be thought of as trying to find the best approximation of fairness given an unfair situation.

That's the thing: the depositors are now unsecured creditors of SVB. The problem is that they don't want to be unsecured creditors. They want to be secured creditors.

They will get some of the proceeds of their loan, if there are any proceeds left over once secured creditors are paid. But that's where their complaints come in. There's almost assuredly not enough to recoup 100% of their deposits. Not only that, it could take a while before they receive anything. Time is money as they say, especially with today's interest rates.

If I have a bank and there are 10 secured customers who have deposited $100 each and 10 non-secured customers who have deposited $100 each and I can only cover $1,200 worth of deposits, the non-secured customers are going to be understandably upset. The 10 secured customers get made whole and then I have $200 left over. I can give each non-secured customer 20% of their $100 deposit.

These unsecured creditors will receive money in proportion to their deposits from what is left over. The questions are: is there anything left over and how much will it cover.

Yes, the deposits do become an unsecured claim on things like the proceeds of loans that are sold off (not the proceeds of their specific loan, but the proceeds of things sold off generally). The issue isn't that people are trying to deny that. The issue is that there's probably very little left over to recoup.

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https://en.wikipedia.org/wiki/EDNS_Client_Subnet

How do you think the bankrupt bank pays it's creditors/depositors? It sells all the assets in bankruptcy to bank #2 and then uses that cash to reimburse the people it owes money to in an orderly way. It doesn't go to each creditor and negotiate the debt separately. The entire point of bankruptcy proceedings are to ensure that the CEO doesn't make his golfing buddies whole by settling their debts and leaves everyone else out to dry.

Assets -> cash -> distributed according to the courts.

> There is no moral, philosophical, or biblical truth that FDIC insured depositors must be paid out first.

No, but it is US federal bankruptcy law. And it was when all the business relationships with SVB were made.