If your bank sells your mortgage to another bank, the second bank now owns that debt. If the first bank goes out of business, you very obviously (separately from the previous transaction) lose any money that isn't insured. I'm not sure what else you would expect to happen.
yes, and I am saying the first bank should have to use the assets it has tied to you to pay off the debt it has to you, before it can sell them in bankruptcy to bank #2.
And we're saying that's not how that works. When the FDIC takes over the bank, they pay out all of the insured deposits, sell all of the assets, and distribute the remaining funds, which in cases like this one are not enough to cover uninsured deposits.
"In the case of a non-delinquent loan, the depositor might elect to “set off” the loan against his/her deposits in order to receive full value for any uninsured funds (i.e., funds in excess of the $250,000 insurance limit). In either case, no “offset” is possible unless the obligations are “mutual” – meaning that the borrower and the depositor must be the same person or legal entity acting in the same legal capacity."
> Some SVB customers told the Journal they have asked First Citizens if their loans can be set off with the deposits that the funds had in their Cayman bank accounts.
> In response to a query from the Journal, a First Citizens spokeswoman said a setoff “isn’t legally possible in this situation,” because First Citizens owns the capital-call lines while the Cayman deposits were with SVB Financial Group, the former holding company of Silicon Valley Bank.
>Presumably these loans were offloaded before the insolvency hit
No, that isnt what it is saying here. The loans weren't offloaded beforehand. First citizens obtained them as a result of the insolvency. First Citizens is claiming that they dont have to perform setoffs for some of the loans they acquired.
First citizens did perform setoffs for other unsecured customers in US branches, similar to how I described in my posts above, as required by law. Customers with accounts AND loans get their loans forgiven before the account balance goes to FDIC insured accounts. However, First Citizens thinks that due to the structure of their purchase and the SVB organization, they are not obligated to do the same for international branch customers with accounts and loans. For those, they get to hold the loan but not the setoff obligation.
Now the FDIC is in the position where they have to decide if they will claw back the loans from First Citizens and forgive them directly.
yes, And I am saying that it is not unreasonable that the bank should have to pay back individuals with assets for sale before covering those without assets.
It all comes down to priority in asset recovery.
There is no moral, philosophical, or biblical truth that FDIC insured depositors must be paid out first. It is just as conceivable to have a system where customers with both bank assets and debts have higher priority to recovery, at least for to funds recovered from their assets..
Anyone using the bank signed a contract that defined how a failure affects them. There is absolutely a moral, philosophical, and biblical truth behind honoring that contract.
Galatians 3:15: "To give a human example, brothers: even with a man-made covenant, no one annuls it or adds to it once it has been ratified."
Proverbs 17:18: "One who has no sense shakes hands in pledge and puts up security for a neighbor."
Outside of that fact, the reason that the system is designed this way is to protect normal people from Rich people destroying these banks. If it were the way you're proposing, only the Rich people taking on the most risk and debt would get paid out, and every normal person using the bank would lose everything. We know this, because that's exactly what happened before the FDIC, which is the entire reason it exists.
I understand that there are legal regulations which generally specify these matters. However, to think that these are immutable is just wrong. Banking regulations change over time and jurisdiction.
To be clear, I'm not advocating abolition of the FDIC. Normal people wouldn't lose everything. The rich still would pay for FDIC payments, just like they now.
You would just see some individuals have less damage, specifically when bank assets in their name are commensurate with bank debt in their name. FDIC payouts would be slightly larger, but again, these are recouped by banking fees, largely paid by the rich
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.
Assets -> cash -> forgive any loans to the people who had accounts -> payoff FDIC insured accounts -> distribute remainder according to the courts
This is what happened for US customers with both loans and unsecured accounts. bank #2 says they dont have to forgive the loans specifically for some customers.
FDIC takes over bank -> FDIC allows people to pay off their loans with the same bank using funds at the same bank -> FDIC pays off insured accounts and takes on debt from the bank -> Sells Assets -> Uses cash to pay itself back by being first in line with the courts.
If it gets to Bank #2, it's not their problem and they specifically don't have to. Also, this wasn't a US bank! It wasn't under FDIC control. That payoff happens before bankruptcy. If the FDIC doesn't take over your bank it doesn't apply.
>Also, this wasn't a US bank! It wasn't under FDIC control
That's the part that I disagree with. My understanding is that FDIC took possession and sold off the International loans to bank number two, but did not discount them by the international account balances.
It doesn't seem right to me that the FDIC can say "it's not my problem we don't have control“ while simultaneously taking and selling the international loans
Which they are, and FDIC now has to choose whether it's going to take back the loans it's sold off to pay the account holders.
This isn't about what happens to FDIC insured accounts, it's about how to apply pre-existing FDIC policy for handling non-insured accounts. The regulation is very clear on how not insured accounts get offset in some cases and the regulations are unclear or discretionary in other cases.
This goes full circle back to my original point that if the FDIC takes control of the International loans, but they should deduct the value of that counts from those loans, just like they did for the majority of the customers
