5 Lessons Learned from Recent Bank Failures

First Republic Bank made headlines on May 1, 2023, when California regulators stepped in to take over the bank after a private rescue fell through. Regulators struck a deal for JP Morgan to take on First Republic’s $92 billion in deposits. The FDIC will share losses with JP Morgan on its loans, averting a massive collapse. The bank’s financial crisis stemmed from nearly $102 billion dollars in deposits withdrawn.

First Republic’s deposit drain in the first quarter forced it to borrow heavily from Federal Reserve facilities to maintain operations, which pressured the company’s margins because its cost of funding is far higher now. News of First Republic Bank’s dire issues comes just six weeks after the collapse of the Silicon Valley Bank (SVB) occurred. The bank’s collapse has had a significant impact on businesses worldwide. Indeed, as reported on Global Edge, the bank was among the top 20 American commercial banks, with $209 billion in total assets at the end of last year. As one of the largest and most successful banks both nationally and worldwide, SVB played a vital role in lending and providing financial services to many of the most innovative and high-growth companies in the technology and life sciences sector.

Understanding the Details
We’ve seen the quick rise of the tech industry and sadly, the great fall of some of them. News of layoffs and downsizing among huge tech companies spread months before the SVB collapse Looking
back, these announcements along with rising interest rates and inflation, were indicators that banks would face stress on their assets. Meanwhile, SVB’s corporate clients— many of whom were tech startups—were burning through their available cash on deposit much faster than usual. The high proportion of bank assets tied up in loans and HTM securities meant that SVB did not have a lot of room for maneuvering when depositors began withdrawing funds in record numbers. In order to fulfill the cash demand, SVB had to start selling its HTM securities much earlier than their maturity date and reflect the lost income.

These examples help provide the background to two major financial institutions’ demise, but times like these can make CEOs and business owners think about their own business financial health and cash. How can we shore up our companies’ financial security to avoid a similar fate?

Applying the Details: Five Lessons You Can Apply Within Your Business

When certain failures happen in an industry, it’s important to take stock of what happened and avoid repeating history. If you are a business owner looking to protect your business from a banking crisis, here are five best practices to consider:

1. Diversify Financial Institutions
Diversify the banks that your business works with. Those who had all their money sitting with SVB and perhaps First Republic are currently facing some difficult circumstances including securing their funds, having to establish new lines of credit and new accounts with different banks. By ensuring that your business works with different banks, you can reduce the risk of losing substantial capital due to one bank’s collapse.

2. Implement Monthly Financial Check-Ups
Another crucial step in ensuring sound financial health for your business is partnering with a trusted business advisor and financial expert who routinely monitors your transactions, accounts, and capital. Having a transparent relationship with a trusted financial professional like a B2B CFO®, for example, will raise awareness of the gaps your business should be addressing and help you identify financial metrics to monitor and gauge the company’s financial health on an on-going basis.

3. Ensure FDIC Backing 
It’s always prudent to have that extra stamp of security, and banks that are insured by the Federal Deposit Insurance Corporation (FDIC) offer invaluable peace-of-mind. FDIC insurance provides a US federal government guarantee that if that bank fails, the government will fulfill any shortfall of cash up to $250,000 per qualified account. If following rule No.1, your business can have accounts across a variety of banks and try to keep the money in each of those accounts below the threshold.

4. Develop Banking Relationships
One often overlooked best practice is ensuring a close relationship between your business and your bank. To do this, have a designated representative from your company as well as yourself communicate with the bank officer managing your relationship. These discussions should include financial news and updates about the other changes in your business. A banker who understands your financial history can be more helpful when planning your business’ future. You will be in a better position to take advantage of opportunities if you know your borrowing capacity and interest
rates ahead of time. Owners with strong banking relationships are often offered better interest rates, loan structures and terms. You never know when you might need a new line of credit or an infusion of cash. Banking relationships can make all the difference.

5. Explore a Range of Options for Cash Reserves
When working with your trusted business advisor, be sure to consider the other options you have for capital and investments. Beyond keeping money in accounts at the bank, explore other options like money market funds, short-term bonds, treasury bills, or other low-risk investments. Some of these options are not FDIC insured, so it is important that you work closely with your financial advisor to make sure these alternatives are sufficiently low in risk and liquid enough that if you need to convert them to cash quickly, you can do so without excessive penalty. Diversifying your investment portfolio is also a safe way to funnel money in various streams so that if one were to fail, you have others as your safety net. Also, consider ways to hold less debt, even when you are growing the business.

Preparing for the Tide
Although we can never predict the collapse of renowned banks, CEOs and business owners can take the proper steps and precautions to protect their capital. Building the right relationships with your banker, setting up an emergency fund, diversifying portfolios and banks as well as consistently monitoring your financial health are all prudent ways business owners can protect their finances in the face of today’s economic headwinds. If you have questions and would benefit from a discussion with a trusted business advisor about your banking situation, please email me at PeggyHead@b2bcfo.com.