An Update on the Banking Industry

A digital image of a bank with icons surrounding it.

Heading into 2023, many business leaders were confident in the safety of their company’s cash. After all, the security of banks hadn’t been meaningfully challenged since the financial crisis. That sense of safety vanished when three major banks collapsed – placing billions in business cash at risk.

With the banking sector in turmoil and regulators scrambling to right the ship, the conversation about bank safety was reignited within the business community. This conversation uncovered some troubling facts about the institutions tasked with keeping deposits safe. Now, many business leaders are asking the same question – has the danger subsided?

What happened to banks in 2023?

To understand the current state of the banking industry, it is first important to look back and learn how the situation has evolved. This begins with reviewing the factors that caused the major bank failures in 2023.

The Government Accountability Office conducted a review of the first two banks to fail – Silicon Valley Bank and Signature Bank. The results of the initial report revealed two main commonalities between the failed banks: unnecessarily risky business practices and poor risk management. These factors also led to the collapse of First Republic Bank later in the year.

Risky Business Practices

Leading up to the collapses, both Silicon Valley and Signature banks strayed from their core markets. They turned their focus to customers in the historically volatile venture capital industry. This industry initially thrived in the post-pandemic world, and deposits at the two banks skyrocketed.

Silicon Valley Bank and Signature Bank saw their deposits grow by an astounding 198% and 134%, respectively, during this time. The other major bank to fail – First Republic Bank – did not stray from their target market, but also experienced significant deposit growth. Unfortunately, the majority of these deposits were above the limit guaranteed by the FDIC. In fact, all three banks had more than twice the level of uninsured deposits than their peers.

This reliance on uninsured deposits is considered risky because depositors are more likely to withdraw these funds during uncertain times. If the banks had taken the proper actions to manage risk, they may have been able to overcome the crisis.

Poor Risk Management

The failed banks did more than court risky customers. They also invested in risky securities like longer-term debt and cryptocurrency. The crisis came to a head when prices for these securities fell at the same time customers needed to access their funds. The banks suffered significant losses on their investments and were unable to meet withdrawal requests.

As these liquidity issues became apparent to depositors, they rushed to withdraw their money – particularly uninsured funds – from the struggling banks. The ensuing bank runs led to the eventual collapse of all three banks.

The Current State of the Banking Industry

The problems that contributed to the bank failures earlier in the year are still being experienced by some banks today. The latest data from the FDIC shows that bank deposits have fallen for five consecutive quarters. In other words, depositors are withdrawing their funds from banks more quickly than they are adding them.

Many banks are solvent and have the cash to meet these withdrawal requests. However, some less-solvent banks may need to sell their securities to free up cash. These sales could come with significant losses since high interest rates have driven debt securities prices down. In fact, the FDIC reports that banks’ unrealized losses from securities increased by $42.9 billion – 8.3% – in the second quarter.

Risk remains elevated in the banking sector, but that doesn’t mean businesses should withdraw all their funds out of fear. Instead, they need to diversify their funds and secure adequate protection so that their cash will be safe even if further bank failures occur.

Protecting Business Cash from Banking Turmoil

The most robust protection for business cash is government insurance through the FDIC or NCUA. This coverage is automatic when a business opens a covered account with a member financial institution.

However, simply opening one account at an insured bank is not enough to provide full protection for most businesses. The reason for this is FDIC and NCUA insurance are limited to $250,000 per ownership category at each insured institution.

Businesses could secure additional protection by manually spreading cash across multiple banks, but this process is extraordinarily time consuming. Fortunately, fintech has made it possible for companies to reap the benefits of multiple banking relationships without the additional work of managing them.

Partner with ADM to Access Extended Protection Without the Hassle

Our company, the American Deposit Management Co. [ADM] uses proprietary fintech to help businesses secure full government insurance for their cash. We do this by spreading business deposits throughout our nationwide network of banks and credit unions so that every penny of a company’s cash is covered.

With ADM, companies don’t have to manage relationships with multiple financial institutions to achieve full protection. Instead, our clients have one account and receive one consolidated monthly statement – making reconciliations a breeze. Plus, they have access to nationally competitive returns and accessibility to meet their needs.

To see how ADM can help secure your company’s cash, contact us today.