Small Business Series: 7 Ways to Protect Your Business from a Bank Crash
The failure of Silicon Valley Bank and Signature Bank has raised the concern of a spreading systemic banking sector risk via a deluge of run on banks. A run on a bank occurs when a large number of customers withdraw their deposits at the same time due to concerns about the bank's solvency or liquidity. A bank run can lead to a liquidity crisis, causing the bank to fail and potentially triggering a broader financial crisis. For US businesses, a bank run can have serious consequences, including the loss of funds and the disruption of operations. In this article, we will discuss what US businesses can do to protect themselves from a run on a bank.
Spread Deposits Across Multiple Banks
One of the most effective ways for US businesses to protect themselves from a bank run is to spread their deposits across multiple banks. By diversifying their deposits, businesses can reduce the risk of losing all their funds in a single bank failure. It is important to note that the Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account per bank, so businesses should ensure that they do not exceed this limit in any one bank.
Monitor Bank Ratings
US businesses should monitor the ratings of the banks where they hold deposits. Various independent agencies, such as Moody's, Standard & Poor's, and Fitch Ratings, provide ratings for banks based on their financial strength and stability. By monitoring these ratings, businesses can identify potential risks and take action to protect their deposits if necessary.
Maintain Adequate Liquidity
US businesses should maintain adequate liquidity to ensure that they can meet their financial obligations, even in the event of a bank failure. Businesses should maintain a cash reserve and access to credit facilities to ensure that they can continue to operate even if their deposits are frozen due to a bank failure.
Use Other Financial Products
US businesses can use other financial products, such as money market funds, to diversify their cash holdings and reduce their exposure to any single bank. Money market funds are mutual funds that invest in short-term debt securities, such as US Treasury bills and commercial paper, and are considered to be low-risk investments. Money market funds are not insured by the FDIC but are subject to regulation by the Securities and Exchange Commission (SEC).
Stay Informed
US businesses should stay informed about the financial health of the banks where they hold deposits. Businesses should regularly review the financial statements and disclosures of their banks and monitor news and industry reports for any signs of trouble. In addition, businesses should maintain a relationship with their bank representatives and ask questions if they have concerns.
Be Prepared
US businesses should be prepared for the possibility of a bank failure. Businesses should have a contingency plan in place that outlines the steps they will take in the event of a bank failure. The plan should include procedures for accessing alternative sources of liquidity, such as credit lines or other financial products, and for communicating with employees, customers, and suppliers.
Work With a Trusted Bank
Finally, US businesses should work with a trusted bank that has a solid reputation for financial strength and stability. Businesses should conduct due diligence before opening accounts with a bank and should seek the advice of financial professionals if they have any concerns. Businesses should also ensure that their bank is insured by the FDIC and is subject to regulation by the appropriate regulatory bodies.
Bank runs and failures happen when you least expect them to happen. There are steps that businesses can take to protect themselves. By spreading their deposits across multiple banks, monitoring bank ratings, maintaining adequate liquidity, using other financial products, staying informed, being prepared, and working with a trusted bank, US businesses can reduce their exposure to the risk of a bank run.
