When regulators closed Silicon Valley Bank (SVB), it became the second-biggest bank failure in US history and the US government-backed fund that protects depositors was stretched to its lowest level since 2015.
Two days later, regulators closed Signature Bank, the third-largest bank failure in US history. Then UBS bought over a struggling Credit Suisse, one of the largest banks in Europe, following a succession of scandals.
After weeks of struggles, First Republic Bank was next on the chopping block. In May 2023, the bank for high net-worth customers was seized by regulators and acquired by the US’s biggest bank, JP Morgan.
Regulators acted in each of these cases to protect deposits. The Bank of England put SVB UK into administration immediately after US authorities shut down the parent firm on 10 March, and as the UK and US governments facilitated the rescue deal, the banks’ clients didn’t lose any money.
Federal regulators ensured Signature Bank customers got all their deposits back, even amounts over $250,000 that were uninsured by the Federal Deposit Insurance Corp (FDIC).
Credit Suisse was purchased by Swiss rival UBS for about $3.3 billion in a deal approved by Swiss regulators without shareholder approval.
At the heart of these collapses was a lack of diversification, weak balance sheets and poor management. In the end, depositors pulled billions out of these banks, which was the final nail in their coffin.
Just after the banking crisis, there was widespread talk of corporates needing to spread their risk beyond one or two banking partners to protect their business should a bank run occur again. But has this happened?
Lessons from the banking crisis
The fallout from a bank collapse can be widespread, affecting customers, employees, creditors and even the economy.
When a bank fails, its clients struggle with short-term liquidity. They can’t access the cash needed for important expenses like payroll and supplier invoices which can grind their business to a halt.
For maximum protection, treasury teams and CFOs should work with multiple banking partners to spread their deposits and risk.
Due diligence should also be carried out to assess potential risks associated with each partner, to make sure deposits will be protected. Having a better understanding of banks’ investment policies will also stand treasury teams and CFOs in good stead.
Recent research has revealed that businesses are taking these lessons on board. Post-crisis, 75% of SMEs were considering diversifying their banking pool, while 77% of European corporates are exploring diversifying their FX counterparties.
Timely reminder
The first anniversary of the banking crisis serves as an important and timely reminder to not put all your eggs in one basket when it comes to banking partners.
Ironically, fears about the banking sector’s resilience intensified again recently when New York Community Bank’s shares lost more than 60% of their value after a disastrous earnings report at the end of January.
In February, the bank revealed major weaknesses in its ability to monitor loans for signs of trouble and replaced its CEO. NYCB, last year the 28th largest bank in the US, has more than $100 billion of assets. If it were to fail, consequences would be felt both nationally and internationally.
For many, the NYCB debacle brings back some bad memories. And makes the case further for businesses to diversify their banking partners has translated into action.
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