This blog appeared on Inside Indiana Business on May 30, 2023 as part of their daily email. We are appreciative of the opportunity with Inside Indiana Business.
It has been an uneasy time for startups and other small businesses wondering if their cash is safe at the banks they have been using for years. The Federal Reserve has continued it’s rate increases to the detriment of fixed income securities often held by banks. I have a client that had a primary banking relationship with First Republic and had a lending term sheet from SVB just prior to it’s failure.
Insured Cash Sweeps: First, before I continue let me share a product that I was not aware of prior to the past two months and that is “insured cash sweeps” (ICS). What an ICS does is take your cash balance over the FDIC insurance limit of $250,000 and place it with other banks in the ICS network. Thus, if you have $2M in cash, that balance is then broken down into eight (8) $250,000 balances which are then all insured 100%. This product was also recommended by a prominent local Indy firm. My client’s CEO put this in place and was able to sleep at night (including leading up the First Republic’s ultimate failure). I recommend you explore this with your current bank and any other solutions that may exist.
Banking Challenges: I am no banking expert but from what I have read cautiously over the last few months is that SVB (and other banks) held long term assets – of high quality – which had a temporary decline in value because of the Feds raising interest rates. If allowed to hold these securities to maturity, SVB would likely still be around. This was exacerbated because in today’s social media speed of and news combined with the ability to log in and send a wire(s) on a moment’s notice. As Warren Buffet recently commented “You can have a run in a few seconds…that…changes everything.”
Why? Because depositors are scared that they only have insurance for $250,000 causing a run at epic speeds. Some say that the Fed saving SVB depositors amounted to a bail out or that it saved VC investors who should know better. I disagree. I saw this as saving thousands of jobs for start ups around the U.S. who through no fault of their own had a bank that was subject to a run and that were going to not make payroll next week.
Is Cash Accounts Receivable? Bed Bath & Beyond had been teetering for months. There were rumors last year, a potential savior interim lending which fell through and then it’s bankruptcy notice. There was plenty of time. However, First Republic released earnings on Monday, April 24 and by Friday, April 28, it was all but over. Landlord’s can prepare for a default on a lease and the impending AR that is pre-petition bankruptcy.
For deposits at Banks? Is our cash really accounts receivable with zero recourse for us other than pulling funds immediately?
Unlimited FDIC Insurance: A U.S. House Committee hearings recently, Rep. Juan Vargas, D-Calif., asked “What can we do? What can the government do to prevent this, so people don’t lose their money?” Michael Roffler former First Republic Bank CEO and President replied “Sitting here today, it’s very hard for me to give any good advice for that. At the end of the day, when the panic sets in, it’s really hard to regain confidence.” No advice – really? The banking industry appears to be burdened with the dreaded “this is the way it’s always been done” disease.
As a depositor, I think we need to move to a fully insured model and not simply “de facto” that the FDIC will step in and find a savior bank with the speed of media and accessibility of funds. With this confidence I do not believe mass depositors will run.
I have immense respect for JPMorgan Chase and I am client personally. However, I do not believe that large banks getting larger at the expense of smaller ones solely because depositors get spooked is a good thing. The only thing that happened after the 2008 financial crisis was that banks got larger. We shouldn’t let smaller banks fail who offer great products that larger banks may not simply because depositors get spooked. If those banks fail because they make bad loans or other bets – fine. However, that cost should be born by the debt and equity holders of the bank – not depositors.
Personally, I do not believe any bank can survive a run if sufficient depositors pulled funds. Mr. Roffler said as much. The industry and regulators should consider a tiered insurance cost system based upon size of balances and spread the cost around. They could also consider excess deposit charges of a certain size (think millions). Whatever it takes.
To the banks, regulators and yes to the Fed I say, “Please leave depositors out of your other business choices and decisions”.
We depositors must have confidence that our cash is still cash, that cash is still king, and that the banking industry will protect it – or this will happen again…and again.
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