Regulators shut down Silicon Valley Bank (SVB) on March 10th (Friday), in the largest U.S. bank failure since the 2008 financial crisis. The failure was attributed to a run on the bank and liquidity issues.
On March 12th (Sunday), the Department of the Treasury, Federal Reserve, and FDIC issued a statement announcing actions enabling the FDIC to complete its resolution of SVB in a manner that fully protects all depositors. Depositors were told they would have access to all of their money starting Monday, March 13. “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer,” said the statement.
In the wake of the SVB collapse, and other banks announcing similar systemic risks, AAFCPAs advises clients—now, and on a regular basis—to review cash management policies, the financial health of your financial institution(s), and your risk and risk tolerance as it relates to Cash Management.
Review your Cash Management Policy
Businesses can assess their cash management policies by following these steps:
- Identify cash management objectives: Identify goals and objectives for cash management. This may include maximizing cash flow, minimizing the cost of borrowing, optimizing returns on cash, and minimizing risks.
- Assess risk tolerance (see Risk Tolerance section below): Risk of loss can be limited or eliminated based on the type of investment and the bank’s insurance. Most banks are insured by the FDIC up to $250,000. Certain other Massachusetts banks are fully insured by the Depositors Insurance Fund (DIF). Review and understand the DIF.
- Analyze the business’s cash flow: Determine the timing and amounts of cash inflows and outflows. This analysis will help identify areas where cash management policies may be improved and assist in identifying not only immediate cash needs but how much operating cash the business needs over the course of the year.
- Evaluate current cash management policies: Determine if policies and procedures are effective in achieving the cash management objectives. This may include reviewing cash handling processes, payment and collection policies, and cash forecasting methods.
- Identify areas for improvement: Based on the analysis and evaluation of current policies, the business should identify areas for improvement. This may include implementing new cash management tools and techniques, such as electronic payment systems or cash flow forecasting software.
- Develop an action plan to implement identified improvements. This plan should include timelines, responsibilities, and budget requirements.
- Monitor and review: Once improvements have been implemented, monitor and review the effectiveness of thecash management policies on an ongoing basis. This will help identify any further areas for improvement and ensure that the business’s cash management objectives are being met.
Evaluate the Financial Health of Your Bank
There are several factors you should consider when evaluating the health of your financial institution(s). The following are a sample of items to consider:
- Capitalization: A bank with a strong capitalization has enough funds to cover its liabilities and absorb losses. You can check your bank’s capitalization by looking at its Tier 1 Capital Ratio or its Total Capital Ratio.
- Asset quality: Banks with a high percentage of non-performing loans or delinquent loans may be at risk. You can check your bank’s asset quality by looking at its Non-Performing Asset Ratio or its Delinquency Ratio.
- Liquidity: A bank with good liquidity has enough cash and liquid assets to meet its obligations. You can check your bank’s liquidity by looking at its Loan-to-Deposit Ratio and its Liquidity Coverage Ratio.
- Profitability: Banks that are profitable are generally considered healthy. You can check your bank’s profitability by looking at its Return on Assets (ROA) and its Return on Equity (ROE).
- Risk management: A bank that has a strong risk management program is more likely to avoid losses from bad loans or other risks. You can check your bank’s risk management by looking at its credit risk management policies and procedures.
You can find much of this information in your bank’s financial statements, which are publicly available. You can also check your bank’s credit ratings from rating agencies like Standard & Poor’s, Moody’s, or Fitch. Finally, you can also talk to your bank’s representatives or financial advisors to get a better understanding of its health and stability.
Assess your Risk and Risk Tolerance
Businesses can assess their risk and risk tolerance by following these steps:
- Identify potential risks: This may include banking risks or other financial risks, operational risks, strategic risks, compliance risks, or reputational risks. *Consider your business’ ability to keep individual bank balances under the FDIC’s $250K insured threshold. In some cases, it may not be practical, or too much of an administrative burden, to maintain balances under $250K. This should be factored into your risk assessment as described below. Consult with your AAF Wealth Management Advisor for strategies to spread balances out while optimizing liquidity and interest.
- Evaluate the likelihood and impact of each risk: Once potential risks have been identified, evaluate the likelihood and potential impact of each risk. This will help prioritize risks and determine the level of risk tolerance needed.
- Determine risk appetite and risk tolerance: Determine your overall risk appetite and risk tolerance level based on your business strategy, goals, and objectives. This will help define the acceptable level of risk you are willing to take on.
- Assess risk management strategies: Assess current risk management strategies and determine if they are effective in managing identified risks. This may include reviewing internal controls, risk mitigation plans, and insurance policies.
- Identify gaps and implement improvements: Based on the assessment of risk management strategies, identify any gaps and implement improvements to strengthen risk management processes and procedures.
- Monitor and review: Once the risk management strategies have been implemented, the business should monitor and review their effectiveness on an ongoing basis. This will help identify any new risks or changes in risk tolerance and ensure that your business is appropriately managing its risks.
SVB Bank Clients
- Identify a new financial institution that meets your needs and cash management policy.
- Identify and update all funds that are automatically deposited into your accounts (funders, donors, e-commerce platforms) as well as all automatic withdrawals (payroll, insurance, pension funding).
- Document any transactions made on Friday, March 10th that did not follow standard internal controls.
- Consider new lines of credits. Consider if you have any letter of credits with SVB for security of leased space.
- Review your money management policy.
If you are a client of SVB or another unstable bank, move quickly but not at the cost of proper due diligence.
The Department of the Treasury, Federal Reserve, and FDIC statement states “The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.”
If you have questions, please contact John Buckley, CPA, CGMA, at 774.512.4039, email@example.com; or your AAFCPAs partner.