Three Lessons Learned from the Recent Bank Collapses

On March 10, 2023, we witnessed the second largest bank failure in U.S. history when Silicon Valley Bank (SVB) collapsed after a run on its deposits by its customers over fears that it was running out of money to meet its liquidity requirements.  Two days later, New York State regulators closed Signature Bank in a collapse that temporarily stranded billions in deposits.  The U.S. government and the Federal Reserve acted quickly to fully protect depositors of both banks and quell immediate fears regarding the stability of the banking system.

With the worst of the crisis largely averted, companies can now look back at the scare and learn from the near disaster.

  • Don’t put all of your eggs in one basket. Given SVB’s outsized presence in the venture capital and technology sectors and Signature Bank’s deep involvement in the crypto space, many startups temporarily lost access to capital over the weekend following the SVB and Signature Bank collapses.  While the FDIC came to the rescue and protected all deposits on account, even in excess of the $250,000 FDIC insurance limit, this may not be the case should something like this occur in the future.  Companies are advised to use multiple banks to mitigate against such a loss as well, as to preserve access to much needed cash should their primary bank collapse.  In addition, companies should assess whether there are other investment or custodial options available other than a depository bank to help diversify their holdings and reduce their risk of loss due to a bank failure.
  • Don’t let your lender force you to maintain all of your accounts with its bank. Many lenders often include an exclusivity clause as a covenant in their loan documents requiring borrowers to maintain all of their accounts with the lender. Borrowers need to push back on these provisions when negotiating loan documents.  Lenders can perfect their security interest in funds held at another bank by obtaining control over such funds by entering into a deposit account control agreement with the third party bank.  The lender can also require that access to account statements be provided to it so that the lender can continue to monitor the financial health of the borrower. While this may not be the lender’s preferred choice, as noted in the first point above, it may be too risky for a borrower to maintain all of its accounts exclusively with its primary lender.
  • Be prepared. If companies hadn’t already learned their lesson from the COVID-19 pandemic three years ago, this latest scare can serve as a wake-up call that the status quo can change quickly.  It is important for companies to have contingency plans for a wide range of potential scenarios.  The recent bank scare showed that speed was essential in gaining access to capital prior to the collapses of the affected banks.  Companies that were trying to withdraw their funds needed to have a plan in place for where such funds could be transferred.  Those that delayed because they did not have such a plan were left scrambling and worrying through the weekend whether and when they would have access to cash and whether any of their funds would be permanently lost.  Having a contingency plan in place can help mitigate the impact of a crisis. Further, boards of directors and audit committees should use this as an opportunity to increase their focus on cash management, risk analysis and mitigation.

The recent SVB and Signature Bank collapses provide valuable lessons for companies with respect to their cash management policies.  Companies should take heed of these lessons and plan ahead to safeguard their assets and mitigate potential risks.

Add a comment

Type the following characters: november, papa, hotel, niner

* Indicates a required field.

Subscribe

Recent Posts

Contributors

Archives

Jump to Page

Necessary Cookies

Necessary cookies enable core functionality such as security, network management, and accessibility. You may disable these by changing your browser settings, but this may affect how the website functions.

Analytical Cookies

Analytical cookies help us improve our website by collecting and reporting information on its usage. We access and process information from these cookies at an aggregate level.