5 Steps Financial Institutions Can Take Right Now In Dealing With The Historic Bank Failures
By Tim Oppelt
Our clients continue to ask questions about what they can or should do in the wake of the Silicon Valley Bank and Signature Bank failures, and more recently the significant credit downgrade of First Republic Bank. Particularly the failure of SVB recalls strong memories for our firm of a couple of other prominent failures from 15 years ago. The first is that of Wescorp—a corporate credit union which failed largely because of accounting adjustments and positions in securities and investments that did not pan out in the short run, but which ultimately largely paid. Asset Liability Management is a very real thing!
But the second is the failure of California State #9 Credit Union. That failure taught us all a lesson that management of uninsured deposits is key, particularly when dealing with anxiety about safety of financial institutions.
What can credit unions expect in the regulatory environment in the near future? ALM modeling, with investment maturities in mind, will be carefully scrutinized by the regulators moving forward. Financial institutions should get out in front of that, and should explore getting the help of a reputable third party. Financial institutions should also expect additional scrutiny and higher expectations on liquidity, which will be a difficult pill to swallow considering the market pressures at play.
Five steps financial institutions can take right now in dealing with this historical moment:
- Examine your uninsured deposit levels and prepare to deal with uninsured deposits either from a liquidity (withdrawal) standpoint, or by helping depositors restructure accounts to preserve and maximize deposit insurance. This is easier for consumer deposits, harder for commercial deposits. SVB was exposed to high levels of commercial deposits, which are also particularly sensitive and mobile. Consider a report to the Board of Directors specifically regarding uninsured shares, their levels and characteristics, and contingency plans (discussed below).
- Look at liquidity. Many institutions are in a tight liquidity position at the moment. Remember that many lines of credit available are not guaranteed lines—i.e., the lender can refuse draws. Particularly for liquidity lenders, like corporate credit unions and the like, they are more likely to exercise those rights in a panic. In short, your contingency liquidity is least secure when you might need it most. In your analysis, consider discounting the value of non-guaranteed lines. Financial institutions already experiencing tight liquidity, particularly those with downward trends in cash + short term assets to total assets ratios, may want to look into what steps can be taken to participate in the newly created Bank Term Funding Program (https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm).
- Communicate and educate with your depositors about your exposure (or lack thereof) to SVB. Make sure they know that you do not have a problem with liquidity and that accounts are safe. This can include responsive talking points, or a Call Center Q&A, about these issues to project confidence to depositors.
- Monitor relationships with loan servicers and Fintechs to ensure that you know how funds flow and that funds will (to the extent possible) not be subject to delay in a failure. Ensure you know how you would recapture servicing if a loan servicer is unable to perform due to their funds being tied up in a failure.
- Do contingency planning. Some depositors might still want their money right away. You’re more likely to cause a panic by refusing them, though you do have a right to take certain preventative measures, such as requiring notices for withdrawals, refusing wires, or otherwise slowing down the velocity of funds. Make sure you are taking a measured approach, as panic easily spreads. Ready talking points about your liquidity position and why you are different from SVB are important in this area.
If your institution needs help with these measures, including examining how you can restructure accounts for additional deposit insurance, our firm has key experience in this area, borne from being in the trenches in the 2008 Financial Crisis, and so many crises before and after. We can assist in completing forms necessary under Operating Circular 10 for Federal Reserve Borrowing, as well as in advising on each of the above areas.