Commonsense CPA: What Does the Recent Banking News Mean For Your Business

Before this weekend if you weren’t in the start-up industry you likely hadn’t heard of Silicon Valley Bank (“SVB”), which collapsed this week due to poor risk mismanagement and not “hedging” or putting guardrails in place if interest rates were to increase. Ultimately this caused a bank run almost overnight and SVB was taken over by federal regulators.

Bank runs are nothing new - in fact the government established the Federal Deposit Insurance Company (“FDIC”), which guarantees depositors’ money, nearly a century ago in 1933 in response to the Great Depression, when banks were failing at an alarming rate. What is new, however, is the speed of money. In an era where money can be moved simply by typing on smartphones, bank runs can happen overnight, as they just did with SVB (the second largest bank failure in US history).

So what can you do as a small business owner to manage your cash?    

First, familiarize yourself with the FDIC insurance coverage limits. FDIC insurance covers deposits held in FDIC-insured banks, including checking, savings, money market accounts, and certificates of deposit (CDs). This insurance limit was increased from $100,000 to $250,000 in 2008 in response to the financial crisis. The insurance covers up to $250,000 per depositor, per insured bank. This means that if your business has multiple accounts at the same bank, your deposits are only insured up to $250,000 in total. If you have accounts at multiple banks, each bank offers its own separate $250,000 FDIC limit. 

Second, if you find your balances exceeding $250,000, we strongly recommend utilizing a deposit diversification strategy. Deposit diversification is spreading your deposits across multiple FDIC-insured banks, ensuring that your deposits are fully insured. For example, if you have $500,000 in cash reserves, you could split the funds between two FDIC-insured banks, with each account holding $250,000. This way all of your deposits will be covered by FDIC insurance, not just $250,000. 

You can also use this as an opportunity to diversify your banking relationships and seek a bit of yield (something we recommended in a recent Commonsense CPA newsletter). There are often convenience and scale benefits to having deposits with the national megabanks. And, simultaneously, as advisors to small and medium sized businesses and their owners, we have many clients who bank with smaller, regional banks. These banks often provide more personalized customer service and are often willing to lend to local, smaller businesses in their community then the “Big Four” banks and as a consequence often become the bank of choice for many businesses in the community. We have great relationships with bankers who would be happy to be introduced to you at these banks. 

While all of the recent banking news seems unsettling, we take a few hints of solace from the Fed’s response to the SVB event. Despite the $250,000 limit rules, the Federal Reserve and FDIC promised to make the uninsured depositors of SVB immediately whole in all of the affected banks, essentially implying that they were raising the $250,000 FDIC insurance cap. The government also moved to strengthen the financial system by taking all the interest rate risk on some bank holdings.  We think it’s unlikely they will be able to roll this implied unlimited depositor guarantee back in the near term, given the potential optics that would result if they supported Silicon Valley and cryptobankers last week and subsequently allowed Main Street American banks to fail, so we expect our clients to have time to consider implementation of deposit diversification strategies.

As always, your Harmony team is here to help you with any guidance and support you need.

Journal Entries

Tax Season Reminder

This is your reminder that this week (March 15th) was the tax filing deadline for multi-member LLCS, S Corporations and Partnerships and that the personal tax deadline is April 18, 2023.  Our LLC/Partner clients have undoubtedly already heard from us but a reminder to be proactive about any issues/questions that are unresolved with your personal taxes.

The Law is Cracking Down on Fee Speech

This Journal Entry is particularly applicable to our restaurant industry clients. Similar to many jurisdictions where laws like DC’s Initiative 82 have passed, restaurants have shifted their compensation models and are using service charges to defray significant cost increases from the removal of the tip credit.  As fees usage has increased, the Washington DC Office of Attorney General (OAG) has been reminding restaurants that all additional fees must be clearly disclosed on collateral to comply with DC’s consumer protection statutes. To learn more there is a Restaurant Fees: Informational Session with OAG on Wednesday, March 22nd, where operators can learn more about best practices.

Isn’t it Ironic..

There’s an Alanis Morisette musical making its way to DC so another generation can totally misunderstand the meaning of irony.  A no-smoking sign on your cigarette break? 10,000 spoons when all you need is a knife? A safety obsessed aerophobic gentleman crashing on his first flight?  All annoying (in one case tragic) coincidences but not ironic.  Signatures Bank, a bank with large crypto exposure was seized by federal regulators as part of the post-SVB banking stabilization actions.  One of Signature’s Directors was former congressman Barney Frank, THAT is ironic.  Barney Frank was one half of the Dodd-Frank Wall Street Reform and Consumer Protection Act that overhauled the federal financial regulatory system to reduce systemic risk. Congressman Frank as a director of a bank that was seized by regulators to stop systemic risk – isn’t it ironic? Don’t ya think?