Stripping a bank of its human or knowledge capital renders it useless.

Banks offer a core service to two distinct customers: they serve as an intermediary between savers–who want somewhere secure to keep their money that will pay a little interest and can be easily accessed–and borrowers, who generally want to borrow money for some period of time and whose needs come with a modicum of risk.

But a good bank is much more than a mere intermediary: Much of its value resides in the human capital, relationships, and proprietary data and systems developed by the bank that provide both lenders and borrowers more than a generic service.

For instance, the community bank in my central Illinois hometown—where I still do much of my banking despite now living 800 miles away—has thrived because its employees intimately know the community and can identify borrowers and projects that are more likely to be successful, therefore being able to pay back their loans. My father, who practiced bankruptcy law in central Illinois until the 2010s, remarked that loans made by community bankers seemed to go south much less frequently than those made by banks with less of a local presence.

The importance of these proprietary assets and other intangible value creators is now in the spotlight, following recent machinations that occurred around the FDIC’s sale of the insolvent Silicon Valley Bank (SVB
VB
).

After SVB’s investments in Treasury bonds lost value, triggering a run on deposits, the FDIC stepped in to take over the operation of the bank. The FDIC’s usual operating plan for a failed bank calls for a quick receivership process that seeks to maximize the value of depositor accounts, the FDIC insurance fund, and the assets for any acquiring bank taking on responsibility for ongoing operations. Accordingly, after a competitive bidding process, First Citizens Bank reached an agreement with the FDIC to acquire most of SVB less than three weeks after the bank went under.

However, according to a lawsuit recently filed by First Citizens, a group of SVB employees had already begun conspiring with another bank, HSBC
HBA
, to move what they called the “core of [SVB’s] profitability engine” to HSBC as their new employer.

First Citizens alleges that this scheme was illegal, as the exodus–which consisted of 42 senior and mid-level employees en masse on April 9th–was facilitated by the illegal use of confidential SVB information, including lists of clients, sales strategies, the names and salaries of employees, and other private information. The lawsuit says that HSCB and the former SVB employees unlawfully obtained and then misappropriated SVB’s confidential, proprietary and trade secret information.

The issue is not that the people who worked for SVB should be compelled to remain: the terms of employment preclude such contracts and California does not allow employees to be bound by non-compete clauses. And, of course, a bank that went under and is taken over by another bank will likely lay off some redundant workers once it begins integrating the new bank, as First Citizens has already done.

However, the litigation does raise an important matter of public policy as it relates to the FDIC receivership process. Naturally, the FDIC should want to ensure that all of the valuable resources of a bank taken over—including the intellectual capital and proprietary assets—will remain intact as much as possible, or else it will be difficult to induce healthy banks to bid on future defunct banks. Put simply, a potential buyer needs to have confidence in just what it is buying.

A system that allows illegal raids of the assets of failed banks could lead to catastrophic consequences. At a minimum, it seems certain that the FDIC would receive smaller bids for these banks to account for this uncertainty, resulting in the FDIC needing to raise insurance fees, costing banks–and their depositors, as well as taxpayers–money. And at worst, it would significantly increase the probability of some banks not being taken over at all due to a lack of viable bidders; this could decimate the FDIC insurance fund, eliminate the value of any uninsured deposits, and leave the communities of defunct banks with one fewer bank that intimately knows its business environment.

For towns like my own—and for the health of our national financial system as a whole—such an outcome would be a disaster.