Bank Closures – Action Items to Ensure You are Protected
The recent bank closures led to many of our clients seeking input as to what they should do to protect business and personal assets. On Tuesday, March 14, we held a webinar to provide action items that should be considered.
Below is an overview of these action items. Here is a link to the entire one-half hour program if you’d like more detailed information.
How we got here
According to Scott Palka, CPA, MBA, CFA, PBO Advisory Group’s consulting CFO, the collapse of Silicon Valley Bank was “dramatic and quick.” The bank’s stock went from $180 to $0 in just two days. SVB serviced the venture capital and tech sectors and had a lot of deposits due to that sector’s M&A activities. When interest rates began to rise, SVB kept its rates low, causing customers to leave for higher yields. This caused SVB to liquidate its long-term bond portfolio and incur significant losses, resulting in the regulators stepping in.
PBO Advisory Group’s Consulting Chief Financial Officer Kristy Facchini stresses this is a “wake-up call and everyone should be concerned” and that it is important to remember that cash is a liquid asset up to the extent of the amount of the deposit insurance. She also notes that different banks and types of accounts have different coverage.
Kristy suggests that you understand:
- The insurance your bank offers in terms of coverage and your exposure
- Which of your accounts, if any, are combined to increase the amount of insurance and which are not
- Your own risk tolerance beyond the insured amounts
Counter party risk
While you may not be directly impacted by SVB’s troubles, organizations that you do business with may be. Kristy advises that you research companies you and your clients use for financial transactions, including:
- Business suppliers, such as the payroll companies and payment processing centers and the risks you face when they are handling your funds
- Customer payment suppliers, as some customers use third parties to pay receivables, and your risk potential
Fraud and cybersecurity
Kristy and Francesca San Diego, PBO Advisory Group’s consulting CFO, are already seeing phishing attempts as a result of SVB’s demise as bad actors are taking advantage of vulnerabilities. If you receive a request to change payment or banking information:
- Have a process in place for such changes and stick to it
- Call the vendor or customer to verify the change, using contact information in your records, not from the email request
- Always use multi-factor authentication
- Do not follow links to input banking information
- Understand your cyber insurance protocols for changing such info and follow them. Not following these protocols could result in claims not being honored.
Managing banking uncertainty
Fran suggests you manage the potential uncertainty by taking the following important steps:
- Compare your net asset position with your risk profile and determine how much liquidity you should have given the type of company structure you have (S Corp, LLC, etc.)
- Evaluate your short- and long-term cash flow needs and how much cash you need on hand to meet these needs
- Review your bank’s ratio of net assets to liabilities on its balance sheet and understand its position
- Talk with your banker about options beyond standard insurance coverage
- Take a deep dive into your financial needs and make a plan for how much risk you should undertake
- Talk to your various advisors about additional types of risk and how you should respond
Our Consulting CFO Rick Dahlseid, CPA offered a few additional considerations for nonprofit organizations, in addition to the other information shared, including:
- If your audit includes a footnote regarding concentrations of credit risk, expect increased scrutiny from your auditors
- Contributions may be affected as donors have less funds to give
- Demand for services may increase as the ripple effect takes hold
- Volunteers may not be able to serve due to expense issues
- Do an assessment of your financial operations and make needed changes to strengthen your financial foundation. Any cracks will be magnified by bank failures.
If you have any questions or if we can help you evaluate your risk, please contact us at (858) 622-1681.