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\u2019s $92 billion in deposits. The FDIC will share losses with JP Morgan on its loans, averting a massive collapse. The bank\u2019s financial crisis stemmed from nearly $102 billion dollars in deposits withdrawn.<\/p>\n
First Republic\u2019s deposit drain in the first quarter forced it to borrow heavily from Federal Reserve facilities to maintain operations, which pressured the company\u2019s margins because its cost of funding is far higher now. News of First Republic Bank\u2019s dire issues comes just six weeks after the collapse of the Silicon Valley Bank (SVB) occurred. The bank\u2019s 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.<\/p>\n
Understanding the Details<\/strong> These examples help provide the background to two major financial institutions\u2019 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\u2019 financial security to avoid a similar fate?<\/p>\n Applying the Details: Five Lessons You Can Apply Within Your Business<\/strong><\/p>\n When certain failures happen in an industry, it\u2019s 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:<\/p>\n 1. Diversify Financial Institutions<\/strong> 2. Implement Monthly Financial Check-Ups<\/strong> 3. Ensure FDIC Backing\u00a0<\/strong> 4. Develop Banking Relationships<\/strong>
\nWe\u2019ve 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
\nback, these announcements along with rising interest rates and inflation, were indicators that banks would face stress on their assets. Meanwhile, SVB\u2019s corporate clients\u2014 many of whom were tech startups\u2014were 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.<\/p>\n
\nDiversify 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\u2019s collapse.<\/p>\n
\nAnother 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\u00ae, 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\u2019s financial health on an on-going basis.<\/p>\n
\nIt\u2019s 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.<\/p>\n
\nOne 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\u2019 future. You will be in a better position to take advantage of opportunities if you know your borrowing capacity and interest
\nrates 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.<\/p>\n