"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."
> 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.
https://archive.is/1d4uw#selection-353.0-357.287 (paywall passthrough for original article)
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.
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..
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.
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
No, but it is US federal bankruptcy law. And it was when all the business relationships with SVB were made.