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Comment by Simulacra | Hacker News Reader

Is it normal for loans to be wiped clean in a bank failure?

No, definitely not, they are the key source of funds for creditors of the bank.

Which group includes, ironically, its depositors.

No, but it's not unsual to be able to offset deposits and loans. If you owe me $X and I owe you $Y, and you won't give me my $X back, why should I pay more than $Y - $X on the loan?

Edit: see this from the FDIC, which suggests this would be an option for depositors https://www.fdic.gov/consumers/banking/facts/borrowers.html

The first thing I’d think to do is write a check to cover the loan drawn on my SVB deposit. Let them explain why they bounced that check and we can take it to court.

Isn't writing a check you know will bounce a crime?

How do I know it will bounce? Last I looked, the funds were there. I’ve been busy…

If it turns out to be a crime, I think I’ll take my chances with a jury trial where all have to agree to convict.

Sounds like you don't know it will bounce? Which is a different scenario.

These were essentially secured loans offered by the bank against funds that had already been deposited. I'm definitely not a fan of Cayman Island banking nonsense, but it seems rather unfair to seize the deposited funds that secured the loan and still try to enforce repayment.

If the loans are no longer secured, then is there any reason to pay? Can payment be forced in any way?

If the bank repossessed my house, for example, I would not continue paying my mortgage.

The loans will be sold off, and they will have to pay whoever buys them.

>If the loans are no longer secured, then is there any reason to pay?

The same reason there is to pay any debt. Damaged credit, judgements, seizure of assets.

Imagine what would happen if you didn’t have house insurance and your house burnt down. Would you expect the mortgage to be waved because the security (the home) was now seriously devalued?

I agree with you, but in this analogy it was also the bank that set your house on fire in the first place. Which is what makes it less intuitive to separate the two.

Well, except the depositors chose to put their money in uninsured accounts.

Yes... I was agreeing with you. That's already the part of your analogy where you said "if you didn’t have house insurance".

I was disagreeing with your quibble in your agreement :-)

Yes. I can even imagine some extreme nonsense where the regulators call the loans because they're not backed by collateral any more.

Loans are an asset on the banks balance sheet and can be sold like any other asset.

Why can't people sell the bank's debt to them?

They probably could, but who would “buy” a liability? If someone wanted to sell you their problems, how much money would you pay for the privilege of the burden?

> who would “buy” a liability?

This is literally what this thread is about, people's debt getting passed on from the bank to someone else

No, when people owe money to the bank, that's an asset on the bank's balance sheet. That's the opposite of a liability. Companies will purchase the bank's assets, because the bank's assets (which are your liability) are worth something.

It doesn't work the other way around: if your end of it is a liability (your loan/mortgage/whatever), nobody wants to buy that from you, because it's worth a negative amount of money, it's a burden, a liability. Companies want to purchase the other end of the deal, because it's what makes them money: it has a positive value.

They could try, but who would pay for it at a worthwhile price? The bank already defaulted. The loan has value and can be sold because the borrower is still solvent.

MSTR bought out it's own Silvergate loan when it collapsed.

So depending on the the loan, you might be able to buy it so you can pay it off at a discount.

Who says they can’t? I can’t find it just now, but I recall reading an article about some firm that approached a number of SVB depositors offering to buy the rights to their deposits at a discount (probably a steep discount at that). This was on or about that Friday or Saturday, before the government announced they would cover more than the FDIC limit.

If I go bankrupt and get protected from my debts, that doesn't mean others who are in debt to me also get protected.

no, those debts will be used to pay off the people the bank owes money to (the depositors).

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