Who Absorbs the Shock
When a bank fails, the losses do not disappear — they get assigned
On Friday, March 10, 2023, the California Department of Financial Protection and Innovation closed Silicon Valley Bank and appointed the Federal Deposit Insurance Corporation as receiver. The announcement arrived at 11:30 a.m. Pacific time. By Monday morning, the FDIC had established a bridge bank, transferred all deposits — including those above the $250,000 insurance limit — and guaranteed that every depositor would be made whole. Shareholders received nothing. Bondholders were wiped out. The 8,500 employees learned their status over the following weeks, in phases, as the FDIC and eventual acquirers sorted through what remained.
Within fourteen days, Signature Bank in New York followed. Within two months, First Republic Bank in San Francisco was seized and sold to JPMorgan Chase at a discount. The three failures represented approximately $548 billion in combined assets — more than every bank failure in 2008 combined. The system held. The economy did not collapse. The contagion did not spread. The response was called a success.
The question is: a success for whom?
The architecture of absorption
Every financial system has a hierarchy of loss absorption. This is not hidden. It is codified in law, in contracts, in the order of priority that determines who gets paid when there is not enough money to pay everyone. Equity holders absorb losses first. Then subordinated debt holders. Then senior creditors. Then depositors. Government insurance — the FDIC — backstops depositors up to $250,000. The structure is designed so that those who took the most risk, the shareholders who bought stock anticipating profit, bear the first losses, and those who took the least risk, the retiree with a checking account, are protected.
The design is clean.
The execution is where things get interesting. When SVB collapsed, the hierarchy operated as scripted at the top: shareholders were wiped out. But the next moves were less predictable. The FDIC invoked a “systemic risk exception,” a provision allowing it to guarantee all deposits, not just those below the insurance cap. This meant that venture capital firms and technology companies with $10 million, $50 million, $200 million in uninsured deposits at SVB were made whole. The stated reason was preventing contagion — if large depositors at other regional banks panicked and withdrew their funds simultaneously, the cascading failures could bring down the banking system.
The logic was sound. Every economist and regulator who supported the decision had good reason to do so. Nassim Taleb has argued for years that systems designed around normal conditions are destroyed by tail events, the improbable shocks that probability models assign near-zero likelihood but that occur with devastating regularity. The SVB failure was this kind of event: a bank whose balance sheet was technically sound under normal interest rate conditions became insolvent when the Federal Reserve raised rates at historical speed. The failure was not caused by fraud or incompetence in the traditional sense. It was caused by a mismatch between the bank’s asset duration and its liability structure, a mismatch that existed at dozens of other banks simultaneously.
So the decision to guarantee all deposits was rational. It prevented a worse outcome.
But notice what happened to the hierarchy. The people who were supposed to absorb losses did absorb them. The people who were not supposed to absorb losses were protected. And the middle layer — the large uninsured depositors who had chosen to concentrate tens of millions at a single institution without diversifying — were also protected. They had taken a risk. They were not penalized for it. The formal hierarchy said they should bear losses. The emergency decision said they would not.
The cost of that protection was borne by the FDIC’s Deposit Insurance Fund, which is replenished through assessments on all FDIC-insured banks. Those assessments are passed through to customers in the form of slightly lower interest rates and slightly higher fees. The cost was socialized — distributed across every depositor at every bank in America, in amounts too small for any individual to notice.
This is how shock absorption works in practice. Not through the clean hierarchy on paper, but through a series of rational decisions that shift losses from those with the capacity to organize toward those without the capacity to object.
Who was in the room
There is a moment in any institutional crisis when the question shifts from “what happened” to “who decides what happens next.” In the SVB collapse, that shift occurred over a single weekend. Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell, and FDIC Chair Martin Gruenberg convened emergency consultations. The people at the table were regulators, banking executives, and representatives of the largest depositors. The depositors who showed up, or whose representatives called, were venture capital firms. They argued, correctly, that if their deposits vanished, they would be unable to make payroll for the startups they funded, which would cascade into layoffs for tens of thousands of workers.
This argument was effective. It was also self-interested in a way that happened to align with systemic stability. The venture capitalists were protecting their own capital. They were also, incidentally, protecting the paychecks of employees who had no seat at the table and no vote on the outcome.
Mariana Mazzucato has documented this pattern across industries in The Entrepreneurial State and The Value of Everything: public institutions absorb the downside risk of private ventures while private actors capture the upside. The pharmaceutical industry develops drugs using publicly funded basic research; the profits accrue to private shareholders. The technology sector builds on publicly funded infrastructure — the internet, GPS, touchscreen technology — and privatizes the returns. Mazzucato’s framework describes what happened at SVB with precision. The banking system’s stability was maintained at public cost. The depositors who benefited most from that stability — those with the largest uninsured balances — contributed least to the insurance fund relative to the protection they received.
The FDIC later estimated the cost of the SVB resolution at approximately $16.1 billion. The special assessment to replenish the fund was levied on banks with more than $5 billion in uninsured deposits, which sounds like the cost was borne by the institutions that created the risk. In practice, those banks passed the cost to their customers. The final bearers of the loss, the people at the bottom of the chain, were individual depositors and borrowers at large banks paying in increments too small to perceive but too consistent to avoid.
I keep returning to a detail from the days after the closure. The notice taped to the glass door of a SVB branch on that following Monday — a single sheet of white paper, the FDIC seal printed slightly off-center, the text in a serif font that conveyed formality without clarity. The glass doors locked behind it. The notice addressed itself to “depositors and customers,” a category that included both the retired schoolteacher with $47,000 in savings and the venture fund with $180 million in operating capital. The same notice. The same language. The same institution standing behind them both. But the schoolteacher’s $47,000 was always protected. The venture fund’s $180 million was protected only because the people in the room that weekend decided it should be.
The pattern beneath the event
What SVB revealed is not specific to banking. The same structure operates in every complex system that encounters shocks: the formal hierarchy of loss absorption exists on paper, but in practice, losses flow toward those with the least capacity to redirect them.
Consider the 2008 financial crisis. Homeowners absorbed the initial shock: lost homes, destroyed credit, erased savings. Banks received $700 billion in TARP funds. The largest banks repaid those funds, with interest, and within five years were reporting record profits. Homeowners who lost their properties between 2008 and 2010 — approximately 3.8 million foreclosures in that period alone — did not receive comparable restoration. Their credit records carried the foreclosure for seven years. Their lost equity did not return. The shock was absorbed permanently by those at the bottom and temporarily by those at the top.
(There is something about this asymmetry of duration that I have not yet been able to state with enough precision — the same dollar amount of loss means fundamentally different things depending on how long it persists on the balance sheet. A bank writes down a quarter and moves on. A household carries a foreclosure for a decade. The temporal dimension of shock absorption matters at least as much as the dollar dimension, and I am not sure the existing economic frameworks account for it adequately. I want to note this gap rather than pretend I have resolved it.)
Or consider pandemic-era layoffs. In March 2020, 22 million American workers lost their jobs in four weeks. The stock market dropped 34% and recovered within five months. By January 2021, the S&P 500 had reached new highs. Median household income did not return to 2019 levels until 2023, and that figure conceals enormous variation: workers in the bottom wage quintile were six times more likely to be laid off than those in the top quintile, according to Brookings Institution data. The recovery operated identically to the crisis — capital recovered first, labor recovered last, and no one designed it that way.
Every system has a failure mode. What matters is which tier of people absorbs the failure.
The hierarchy sounds orderly on paper. Equity first, then debt, then depositors, then the public. In practice, the hierarchy reshuffles in real time based on who can organize, who can advocate, who can present their losses as threats to the system itself. The venture capitalists at SVB could argue — and did argue — that protecting their deposits was protecting the economy. The homeowner facing foreclosure in 2009 could not make a comparable argument, because individual foreclosure does not threaten systemic stability.
It only threatens the individual.
What the structure reveals
Joseph Stiglitz has written about what he calls “ersatz capitalism,” a system that socializes losses while privatizing gains. The phrase captures something real, but I find it incomplete. It implies a deviation from some truer form of capitalism in which both gains and losses would accrue to those who earned them. What the SVB episode and the 2008 crisis and the pandemic recovery collectively suggest is something different: the asymmetric distribution of shock is not a corruption of the system. It is an output of the system functioning under stress. The capacity to redirect losses is itself a form of capital — perhaps the most consequential form. The advantage of scale is not only higher returns in good times but insulation from losses in bad ones.
This does not require conspiracy. It does not require coordination. It requires only that the people making emergency decisions are responsive to the arguments of those who are present, and that the people who are present are, by definition, those with the resources to show up.
I do not know whether the pattern I am describing constitutes a design flaw or an inherent property of systems that distribute resources unequally and then encounter shocks. The distinction may not matter in practice. What I observe is that the pattern repeats — in banking, in housing, in healthcare, in labor markets — and each repetition follows the same structure. Losses settle. They move from balance sheets that can absorb a write-down to households that cannot absorb anything further. Not because anyone decided they should, but because the architecture of response makes no other distribution possible.
The system held. The economy recovered. The losses were absorbed. It is worth asking, with some precision, what it means that the answer to “who absorbs the shock” is always legible after the fact and never negotiated before it.
-Aimé
Aimé Halden writes Uninsurable, a newsletter about the systems that shape who is protected and who is not. Subscribe for weekly analysis.