April 5, 2023
By Elinor Litwack, Partner, Outsourced Accounting & Advisory Services
As the 2023 banking crisis unfolds with the recent collapse of Silicon Valley Bank (SVB) and Signature Bank, all eyes are on what happens next. Fueled by the “blame game” and the media frenzy around vulnerabilities in the banking system, many businesses and consumers have lost confidence and are contemplating withdrawals from institutions they perceive to be at risk. This approach is not only impractical, the alternatives to traditional banking share similar weaknesses. A better strategy is to use the current crisis as a wakeup call. Review your current banking relationships and develop a diversification plan that protects your organization from isolated bank failures.
Understand the FDIC Limit and How it Pertains to your Bank Balances
The Federal Deposit Insurance Commission (FDIC) insures $250,000 per depositor, which means that in a scenario where a bank collapses, customers with balances over $250,000 may lose their funds in excess of that limit. When SVB collapsed, there was an agonizing two days when 100% of SVB customers’ funds were frozen. Customers were promised $250,000 back, whether they had $300,000 or $15 million in the bank. On day three, the government announced that the FDIC limit would be lifted and SVB depositors would have access to their full deposits. With a collective sigh of relief for those affected, the question is whether the federal government will always cover 100% of deposits in response to crises or enforce the $250K limit. Many believe the government will likely cover the full deposited amounts to avoid an economic meltdown, but that is not guaranteed.
In light of SVB’s collapse, many organizations are tempted to spread their bank balances among multiple FDIC-insured banks. While this might seem like a good plan on the surface, managing any more than two to three banking relationships creates its own risk. It adds the administrative burden of managing cash flow among multiple banks, and a requirement to follow the proper internal controls specific to each bank. A more practical solution is to use an Insured Cash Sweep (ICS) account to spread funds across a banking network. Most banks offer an ICS Sweep option, allowing you to manage the entirety of your funds with one bank while it’s spread out over a banking network behind the scenes. Keep in mind that the downside for ICS accounts is a low interest rate on deposits.
Maintain an Ideal Number of Banking Relationships
Organizations who needed Paycheck Protection Program (PPP) loans and other financial instruments to weather the COVID-19 pandemic learned that it is critical to have more than one banking relationship during times of crisis. If you are calling a 1-800 number with thousands of other customers, odds are you will not get the urgent, quality support you need. During the PPP frenzy, many organizations who have always banked with large commercial banks were so desperate for funding that they opened new accounts with community banks who were available by phone. A crisis affecting cash can include anything from an economic disaster to a one-off fraudulent wire. In all cases, you need a banker that picks up the phone and rolls up their sleeves. To protect your organization, have two to three banking relationships that are diversified among small and large institutions.
Consider Potential Risk from the Use of Third-Party Technologies
Organizations that rely on cloud-based tools to support their financial operations, such as payroll companies, should also consider the risk associated with those companies. Third parties that hold or move money can put your organization at risk if their funds are concentrated in one bank. In a recent example, both Rippling and Bill.com kept a significant amount of funding with SVB, but they were able to tap into their other banking relationships to avoid massive delays in customers’ payroll and bill payment cycles. Unfortunately, other third-party providers experienced slow transaction processing time and frozen funds. If your organization is employing third-party cloud technology as part of your financial infrastructure, do your research. Decide whether your vendors are following sound financial practices and the level of risk your organization can tolerate. Look into how they responded in earlier crises.
Fraud is Still the Largest Risk in Banking
FDIC limits and bank collapses aside, the most pervasive risk in banking is the number and frequency of fraud schemes that put your cash at risk. These scams (including email impersonations of a CEO requesting an urgent wire, a vendor requesting a bank change, an employee re-routing their direct deposit, and others) have become more frequent and sophisticated overtime. While your leadership team and board are focusing on how to protect cash during the recent banking crisis, they can also use this as an opportunity to evaluate internal controls. Make sure your organization is protected from every day fraud schemes in addition to infrequent and unlikely bank runs.
Each nonprofit organization is different and should consider its unique needs during this uncertain period for the banking industry. Consult a CPA with specialized knowledge of nonprofit organizations for help with your organization’s banking questions.