As customers seek higher returns on their money outside of the banking system, rising interest rates will continue to present challenges to banks that have experienced deposit outflows. This has forced many banks to raise deposit rates, lowering profit margins. Deposit outflows have also forced banks to sell assets—that they had intended to hold to maturity—at a loss, in order to generate the cash required to cover deposit withdrawals. These losses have reduced the equity value of the banks, weakening their ability to withstand future losses, and worrying their customer bases. While fear in the banking system has subsided, these risks have not gone away. The Federal Reserve is expected to raise rates at least once more during this rate cycle and possibly more if inflation continues at current levels. Additional rate increases would continue to weaken the deposit base, profitability, and capital position of many U.S. banks.
What’s being done at an institutional and policy level
The government took a critical step in March when, in the wake of the SVB and Signature Bank failures, it insured all deposits held by customers of those banks. This stopped a growing run on banks with the least stable deposit bases. Going forward, the Fed will need to balance its desire to aggressively combat inflation with its desire to keep the economy healthy and the banking system stable. In addition, bank regulators will need to reconsider what constitutes a stable deposit base, given the speed at which deposits fled certain vulnerable banks in early March. This may mean greater capital requirements and restrictions on long-duration and illiquid assets that are classified by banks as held to maturity.
Reducing exposure to banking risks
It is challenging for business customers to predict the exposure of a given bank to the interest rate risk that brought down SVB and Signature. However, businesses should have multiple banking relationships and keep sufficient funds at each of these institutions. This will ensure access to funds in the short term if one bank were to fail.
Bank failures are rare, but can be very disruptive, even if a business’s deposit amounts are below the stated $250,000 FDIC deposit insurance limit. Customers of failed banks should be able to access their bank accounts and move money the same way they did prior to the bank entering receivership, although there may be a short period of disruption that should not be longer than a day or two.
While depositors should be able to access capital, small businesses that had revolving lines of credit from the bank, including credit cards, may need to quickly find other options. Once a bank enters receivership, the ability for borrowers to access additional funds can be terminated. This could be extremely painful for small businesses that depend on bank lines for the routine operation of their business.
If a small business has its primary bank enter receivership, the first thing management should do is ensure that the business is still able to access its deposits and that its ability to pay bills and receive funds remains unchanged. Next, management should assess its dependency on credit from the bank and quickly look for alternative financing companies. This may mean looking for a new bank relationship altogether as many banks will require a business’s primary deposit relationship in exchange for providing credit. If additional capital is needed beyond what a bank is willing to provide, small business owners should explore capital options provided by non-bank alternative lenders.
Finally, if the bank closure has been widely publicized, as the SVB closure was, many customers and suppliers may be concerned about the health of the bank’s business clients. Suppliers will worry about being paid, customers will worry that wires and auto-payments may no longer go through, or worse, might end up in an account that has been seized by the government. It will be important to contact critical suppliers and customers to let them know that everything is stable and to answer any questions about solvency and how payments should be made going forward. In troubled times transparency is key and builds a level of trust that can strengthen relationships for years to come.
Ben Johnston is the chief operating officer of Kapitus, a leading provider of financing for small and medium-sized businesses. As both a direct lender and a marketplace with an expansive network of financing partners offering a variety of products, Kapitus has provided over $5 billion in growth capital to over 50,000 small businesses.
