Is Your Bank at Risk of Failing? These are the Signs You Should Look For
How well do you know your bank? As we’ve recently found out with the high-profile collapses of Silicon Valley Bank (SVB) and New York-based Signature Bank, financial institutions are not infallible. If their collapses prove anything, it’s that whenever your small business deposits money or otherwise does business with a bank, you run the risk of your bank collapsing and losing any money beyond $250,000 (the amount insured by the federal government) that you may have tied up in that bank.
Wall Street has a fancy term for all this – systemic risk. This risk is almost treated as an abstract risk since banks don’t collapse very often – the fall of SVB and Signature marked the first time financial institutions collapsed since the Great Recession began in 2008 – but the way the two banks collapsed, and how quickly they collapsed, should remind everyone that dubious investment choices and changing market conditions could lead to your bank’s insolvency. Most importantly, the collapses are once again a stark reminder that systemic risk shouldn’t be seen as abstract, but as a very real risk.
What Happened and Why is it Important?
SVB’s collapse was caused, in part, to investing much of its deposits in US Treasury bonds. When interest rates were hiked, the value of those bonds plummeted, setting off a domino effect: SVB, short on liquidity, sold those bonds at big losses, prompting customers to seek to withdraw their money en masse. This caused the bank to collapse and the Federal Deposit Insurance Corp. (FDIC) to take over to ensure that customers got their money back.
Signature Bank, whose customers included Silicon Valley startups as well as high-margin small businesses in the real estate and legal professions, faced a cascade effect when SVB collapsed. According to regulatory filings, nearly 90% of its $88 billion in deposits were uninsured, meaning that most of its customers had more than $250,000 in holdings with the bank (remember, the FDIC only insures up to $250,000).
Both Signature and SVB were also one of the few banks to take on cryptocurrency deposits. Cryptocurrency firms such as Bitcoin have been steadily declining for roughly a year.
Not ‘Too Big to Fail’
We all learned from the 2008 financial crisis that financial institutions aren’t ‘too big to fail’ as they once claimed. The same goes true for regional and local banks, and the collapses of SVB and Signature Bank prove that. Collapses are contagious as well. If one bank collapses, customers of other similar banks may panic and want to take their money out.
Many Signature Bank customers panicked after SVB’s collapse and sought to withdraw their cash en masse – a terrible situation for banks since most banks typically don’t have all the cash on hand to back up all of the money that their customers have entrusted them with. New York banking regulators and the FDIC took over the bank to assure customers that their money, uninsured or not, was still available to them.
What Should You do?
The bottom line: This situation should underline the fact for small business owners that you always need to be on the lookout for signs that your bank is in trouble. After all, banks have the right to scrutinize you, the small business owner, whenever you ask for a loan. Conversely, you have every right to scrutinize your bank by always being on the lookout for signs that it may not be financially healthy before you trust them to hold your hard-earned money.
This, of course, doesn’t mean that you should hide your small business’s cash reserves under your mattress. You can, however, keep a checklist of things to watch for to make sure your funds are safe in your bank.
#1 Check the Share Price
In 1999, the federal government repealed a long-standing set of banking regulations that formed the Glass-Stegall Act, thus allowing financing institutions to be publicly traded. Once the repeal took effect, it wasn’t just large financial institutions that went public, but many regional and local banks went public as well. A quick glance at your bank’s share price should give you a quick snapshot of its financial health, if its shares drop suddenly, it could indicate that there’s a problem.
#2 Is Your Bank FDIC Insured?
You should only deposit your business’ money in banking institutions that are FDIC insured. Almost
every reputable bank is, but it’s worth making sure anyway.
#3 Is Your Bank Selling Assets?
You should check the news once in a while to see if your bank is taking any actions indicating that it may have liquidity problems. For example, if you have a loan with your bank and you suddenly see that it is being serviced by another institution, it could indicate that your bank has sold some or all of its loan portfolio in order to make quick money. While this isn’t always the case, selling assets could mean that your bank is running out of cash, so this should act as a reminder to just look a little deeper.
#4 Is Your Bank Making Cuts?
Is your bank actively trying to save money? If your bank is taking actions such as closing branches, laying off workers, and eliminating cash-back rewards or other incentives, it could indicate that it is hemorrhaging cash.
#5 What Does Your Bank Invest in?
Banks keep the insured portions of deposited money in FDIC banks to gain interest, as well as a portion of it in an on-site bank vault to handle customer withdrawals. Banks can also invest a portion in stocks, bonds and real estate as a way to make more money. If your bank is publicly traded, you may want to check out its most recent annual report (form 10K), which should reveal what it is investing in. If your bank is investing in high-risk assets, then it could be at risk for a liquidity crunch if those investments go south.
#6 How is Your Bank Rated?
The FDIC keeps a running list of banks it considers to be problematic, but isn’t obligated to make that list public. However, Weiss Bank Ratings rates banks and largely uses the same guidelines as the FDIC in identifying high-risk banks.
#7 Are you Diversified?
If you own a high-margin small business such as a doctor’s office or law or accounting firm and have more than $250,000 in cash reserves, your best bet is to diversify the list of banks in which you deposit your money so that no single institution has more money than what is federally insured.
If your bank does collapse, getting your money back could be a long process, even if it’s FDIC insured. Therefore, it’s important to do your research on any bank that you are seeking to do business with. Keep a checklist of factors to watch for that could indicate that your bank is having liquidity problems.