It’s hard to believe it’s more than a year on from the biggest US bank failure since the 2008 global financial crisis. On 10 March 2023, regulators closed Silicon Valley Bank (SVB) and the US government-backed fund that protects depositors was stretched to its lowest level since 2015.
The crisis spread and banks such as First Republic, Signature Bank and Credit Suisse were caught off guard and suffered deadly consequences. This was a stark reminder to treasurers that banks can fail, and it’s crucial to have a diverse pool of banking partners. Don’t put all your eggs in one basket, as the adage goes.
In recent times, issues have flared up again, this time in the US regional banking sector. New York Community Bancorp has disclosed major losses and customers are withdrawing deposits, fuelling fears of renewed weakness in the sector, which was hit so hard last year.
Last year’s banking crisis showed that a failure can cause serious short-term liquidity issues that can affect vital expenditures, such as payroll and supplier invoices, even if it’s only for a few days. By relying on one or two banking partners, treasurers can leave themselves at serious risk.
In my view, treasury teams should look to deposit with a minimum of three banks. This means that, should a bank get into difficulty, they have cash elsewhere and can make vital payments, while not having to manage too many banking partners, which we all know can be resource-intensive.
The positive news is that the majority are taking this lesson on board, with 75% of businesses considering diversifying their bank pool. This saga has also dented treasurers’ trust in the banking sector and, as a result, an increasing number of businesses are looking at other solutions – with 92% having conversations about virtual account solutions.
To make sure each of their banking partners has balance-strong sheets and is risk averse, treasury teams must regularly question their banks and fintech partners, particularly regarding their investment policies. This was a critical error in the Silicon Valley Bank case.
A bank serving start-up tech firms shouldn’t be investing in longer-term US government bonds that take a decade to yield results. If businesses had investigated this more closely, they probably would have seen the risk and moved deposits elsewhere before the trouble started.
Our research shows that only half of businesses always enquire about the credit rating of their banking or fintech partner, while 47% said they sometimes enquire, but not always, and only 3% said they don’t do it at all. Treasurers must always ask, to enable a better understanding of their bank or fintech’s investment policies.
Further, treasurers should be more suspicious of banks offering above-the market yields. Silicon Valley Bank was offering positive yields on euro accounts when interest rates were negative. This should have raised suspicion, as there is no such thing as a free lunch. When offered yield above risk-free assets, you are most likely taking on additional risk.
By relying on one or two banking partners, treasurers can leave themselves at serious risk.
Last year’s crisis highlighted that a bank failure can have a knock-on effect for other banks and businesses across the globe. It should serve as a timely reminder to corporates to spread their risk.
Treasurers should continue to follow the markets. If a situation were to arise where a bank’s share price drops by 50% on a Wednesday, they should act as if that bank would be closing on Saturday and withdraw their money.
If you haven’t made moves to diversify banking partners or tighten due diligence, reading up on the impact of last year’s crisis on corporates will change your position.
Laurent Descout is the founder and CEO of Neo, a cross-border payments and foreign exchange fintec
This article was taken from Issue 2, 2024 of The Treasurer magazine. For more great insights, members can log in to view the full issue.