How Nonprofits Should Respond to the Failures of Silicon Valley Bank and Signature Bank

Last week, two banks failed. You probably heard!

There is no shortage of analysis and punditry about the failure of Silicon Valley Bank and Signature Bank and the government’s response to these failures. That is not what this post is about. This post is about "never wasting a good crisis" and how nonprofits should react to what happened.

Before I became a nonprofit professional, I had the pleasure of working at CoBank, a large bank that is part of the farm credit system. One of the many types of financial risk that we helped our clients manage at CoBank was “systemic risk.” One of the risks that banks face, including those where nonprofits may hold their accounts, is systemic risk. This refers to the risk of widespread disruption to the financial system, such as a major economic downturn or the collapse of a large financial institution.

Most organizations, particularly smaller organizations, assume away systemic risk, and as a result, many organizations are exposed to systemic risk, as ten thousand startups learned last week. If you have not examined your banking relationships since the financial crisis of 2008, now is a good time. Here are some specific steps nonprofits can take to help manage their exposure to systemic risk and protect their financial assets:

Diversify cash reserves across multiple banks or financial institutions.

Be aware of FDIC insurance limits. We have all learned about risk and return. If you take a risk, you should expect a return that is commensurate with the risk you take. The risk premium for having uninsured deposits is ZERO. So, why are we taking a risk but not getting rewarded for it? A lot of organizations are thinking about this situation this morning. You should too.

Consider alternative investments such as Treasury bills or money market funds for idle cash. Examine your cash management system based on what happened last week to determine if it still meets your needs.

Evaluate banking relationships and work with reputable and financially stable banks. There are approximately 4500 commercial banks in the US only four have total assets greater than $1.0 trillion. Those are JPMorgan Chase, Bank of America, Wells Fargo, and Citibank. Should you concentrate your cash in one of these four banks that are “too big to fail?” This question must be asked even though I am not a fan of further consolidating our banking system.

Finally, understand the banking relationships of key vendors such as your payroll processor and retirement plan administrators, and anyone else that manages cash for you.

I do not think the risk profile for nonprofits has changed much in the last week, but a quick check under the hood is warranted.