|
|
|
|
|
|
by catbird
1317 days ago
|
|
|
What does it mean here that “the shareholders will take a hit?” Do the shareholders normally receive some regular payments that would stop (or be reduced) in that situation? I know nothing about finance, but the stories unfolding this week have me interested to learn more about how all this works. |
|
|
The bank promises to pay the depositors interest, and the bank collects interest from the loans it makes.
If the bank made good loans, the difference between the interest it pays and the interest it collects increases the bank's capital, and at some point it may pay dividends to the shareholders.
If the bank made bad loans, and some of them are not repayed, the losses come out of the bank's capital.
If the capital goes below some regulatory threshold, a corrective action must be taken. The bank can raise more capital, or get acquired. If a corrective action is not taken, the FDIC takes over the bank, and either sells the bank, or closes it and distributes the remaining assets as follows:
First, to cover deposits up to the insured limit, which is $250K per account. Then to deposits above the insured limits, then to creditors according to seniority, and finally, if there's anything left, to shareholders.
In other words, shareholders takes the first hit, then creditors, then deposits above the insured limit, and finally deposits below the insured limit.
If the deposits below the insured limit take a hit, the FDIC covers that from its insurance fund.
This is of course a very simplified version.