Our previous blog, Unintended Consequences addressed the possible impact from recent bank failures on retail depositors. The damage could range from a slight inconvenience to financial ruin if the FDIC failed to cover deposits greater than $250,000. In the case of Silicon Valley and Signature Bank, regulators decided those banks posed a systemic risk and subsequently guaranteed all their deposits under an emergency exemption. This commentary is focused on larger bank depositors who do not have the ability to restrict their funds within FDIC limits putting them in a different boat from retail investors who have more options.
Larger companies and institutions that run multi-million, or multi-billion-dollar operations must keep large sums on deposit with their preferred banks to meet daily liquidity needs. They simply cannot operate without ready access to significant levels of cash, most of it uninsured. As such, they rely on banking regulators to closely monitor the health of the banks under their jurisdiction. In the case of Silicon Valley, Signature Bank, and First Republic, the regulators were apparently asleep at the wheel. Additionally, what about the Wall Street banking analysts, the supposed experts on those institutions? This must be disconcerting to CEOs and CFOs trying to compete in the global marketplace who suddenly have one more risk over which to worry.
These executives must take due diligence into their own hands and look more closely at the bank with which they transact business. That’s easier said than done; a farmer may know a lot about machinery, fertilizer, pesticides, crop rotation, and hedging strategies, but to expect him or her to understand the intricacies of banking is a bit much. Large companies staff internal teams of financial experts to prudently manage their cash, leaving the bare minimum exposed. Smaller companies often delegate cash management to qualified investment advisors with their securities held in segregated accounts, not co-mingled with bank assets. There is no perfect solution to this situation, and everyone must work out for themselves the best way forward.
On a related note, many of our nation’s companies and farmers have long-standing relationships with smaller community banks. Most of these banks are run very conservatively, unlike the large banks that recently failed due to aggressive lending practices. Treasury Secretary Janet Yellen’s comments last week that uninsured deposits will be protected only at banks deemed to be systemically risky created a visceral blowback from the ICBA (Independent Community Bankers of America) a trade organization representing smaller banks with almost $5 trillion in combined deposits. To view ICBA’s comments click here: ICBA. As is evident, the situation within the banking industry is a hot mess currently and will take time, creativity, and cool heads to resolve.
