Banks are generally considered bastions of safety. But with three of the four largest bank failures in American history occurring in 2023, many companies have begun to question this view. Businesses with significant cash reserves are especially concerned with the risks to their cash, should their bank become insolvent.
Corporate cash reserves help businesses cover day-to-day expenses, fund expansion opportunities, survive an emergency, and weather economic changes. With such vital roles to play, protecting this cash from bank failure is paramount.
Bank Failures Pose a Significant Risk to Businesses
While the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank are still fresh in mind, historical evidence also points to the risks associated with bank failures. During the period surrounding the Great Recession, more than 500 banks failed. And just a few decades earlier, the Savings and Loan Crisis resulted in 1,000 collapses.
When a bank collapses, large cash reserves can be at risk. If the failing bank is an FDIC member, companies with more than $250k will not have access to their excess cash as they wait for the FDIC to sell the bank’s assets. At that point, depositors may recover a portion of their uninsured deposits, but some or all this cash could be lost forever.
How Businesses Can Protect Against Bank Failure
Businesses could avoid the risk of bank failure by not keeping their cash in a bank, although this really isn’t practical for most firms. There are a few alternatives to bank accounts, but each has drawbacks. For example, keeping millions of dollars in physical cash is typically unwise for many reasons, including the risk of theft and inability to earn interest. Treasury securities are an interest-bearing alternative to physical cash that is guaranteed by the U.S. government. However, their value is susceptible to market fluctuations until the securities mature. This structure can prevent Treasuries from providing the liquidity that businesses typically need for their cash reserves.
While there are few reasonable alternatives to a bank, businesses don’t have to just accept the risk of bank failure. Following the devastating bank failures of the Great Depression, the U.S. government implemented several methods intended to prevent bank turmoil. Among these was expanded authority for the federal government to intervene during a bank run. Additionally, the Federal Deposit Insurance Corporation [FDIC] was created to insure deposits against bank failure.
Protecting Deposits from Bank Failure with FDIC Insurance
The FDIC is a government agency backed by the full faith and credit of the United States government. It protects certain types of deposits in participating U.S. banks against the risk of bank failure. These types of deposits include checking accounts, savings accounts, money market accounts, and Certificates of Deposit [CDs].
The FDIC does not insure securities such as stocks, bonds, and mutual funds (including Money Market Mutual Funds). Additionally, the FDIC only protects deposits up to $250k per account ownership category at each insured bank. Businesses often keep significantly more cash than the traditional FDIC limit. If these deposits are kept in a single bank, it can leave the funds above the $250k limit at risk.
Accessing Extended Deposit Protection
Since the FDIC limit is per institution, businesses have options for extending their total coverage. They could open accounts at multiple banks and receive $250k of coverage at each institution. However, this process is time-consuming to properly manage. Further, some businesses with large reserves would need an entire team to manage banking relationships, reconcile monthly statements, and monitor the national market for competitive interest rates.
Fortunately, advanced financial technology – commonly known as fintech – has simplified the process of achieving extended deposit insurance. With a fintech-powered deposit management company, businesses can get the benefits of multiple bank relationships without the hassle.
Extended Deposit Protection with Marketplace Banking™ By ADM
At the American Deposit Management Co. [ADM], we help businesses optimize cash reserves through a concept we call Marketplace Banking™. It leverages our proprietary fintech to spread business cash across our nationwide network of financial institutions that compete for deposits.
With Marketplace Banking™, businesses can access FDIC / NCUA insurance for all their cash – above and beyond the traditional $250k limit. In addition, firms receive nationally competitive interest rates and liquidity that meets their needs. We accomplish all this with one account and one consolidated monthly statement.
To learn more and get started today, contact us.