As depositors of Silicon Valley Bank are painfully finding out, money in a checking account is not exactly the same as dollar bills in your wallet.
Money in a checking account are effectively overnight loans to the bank, which are automatically renewed daily, until withdrawn.
The bank borrows money from you, on an overnight basis, and then invests these money in long-duration assets such as 10 year government bonds.
A bank failure happens when the bank's assets have declined in real-time market value such that those assets can no longer be sold to fulfill all overnight withdrawal requests.
However, the entire global economy functions on the implicit assumption that checking accounts are in fact the same thing as dollar bills in your wallet.
When I login to my bank account online, I see a certain number of dollars. These dollars are presented to me as readily available "cash under the mattress". Unbeknowst to me, these dollars are not readily available. They have been invested into illiquid long duration assets, such as 30 year mortgages at 3.5% rate of interest, far below the current overnight interest rate of 4.5%.
Throughout the process of setting up the checking account, signing the paperworks, it was not made clear to me that my "readily available" cash deposit was actually a loan to the bank. And that, in the event of a bankruptcy, no pun intended, amounts above 0.25 million would be considered as a loan to the bank, payable only up to the amount realized from the fire sale of the bank's remaining paltry assets, minus lawyer fees.
Many highly influential figures in the financial space are right now calling for a taxpayer funded bailout of SVB overnight deposits. Failing which, they claim, would result in a loss of confidence in thousands of small banks.
Question: Is the practice described above, to wit: representing overnight loans that are backed by duration mismatched assets as a form of "bailment", and marketing a bank's services as such, a form of deceptive advertising?
