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The recent downfall of Silicon Valley Bank and Signature Bank has sent shockwaves through the financial realm, serving as a chilling wake-up call to executives that the bedrock of their organization's financial stability is vulnerable to sudden, unforeseen events. As speculation rises that more banks could follow suit, CFOs must proactively arm themselves with the knowledge and strategies to safeguard their organizations from credit risks. Now, more than ever, it's crucial to take actionable steps to ensure financial stability and minimize the impact should core banking partners flounder.

Below, we will outline ways to protect your organization from credit risks, ensuring a soft landing if your banking partner experiences a hard fall.  

Do Your Homework and Evaluate Your Prospective Banking Partners

With the recent bank closures in mind, CFOs must remember to evaluate their existing and prospective banking partners meticulously.

To get started, you should consider the following questions:

• How well acquainted are you with your organization's bank?
• Is your bank engaging in high-risk activities?
• Does your bank meet your current lending and liquidity needs?
• Presently, numerous banks face unrealized losses due to rising interest rates. Is your bank one of them?

Establishing a set of criteria that caters to your organization's unique needs when selecting a bank is essential, ensuring alignment with your financial objectives and risk tolerance. It's also important to understand that you should avoid choosing a bank merely based on convenience or low-cost services.

As a CFO, your priority should be to ensure that the bank appropriately fits your organization's specific requirements. This necessitates a comprehensive examination of the bank's financial statements, an assessment of its overall stability, and an evaluation of its involvement in risky activities that could compromise its ability to collaborate effectively with your organization. Another crucial step is to review your bank's Moody's bond rating, ensuring it is not on the watchlist for a potential downgrade. Comparing your findings with those of other banks is crucial for making an informed decision.

Given the intricate nature of the task, engaging the expertise of financial professionals may be advisable to help navigate the complexities of bank evaluation. Doing so can ensure a thorough examination of potential banking partners, contributing to your organization's long-term financial success. Remember, the objective is not merely selecting any bank but choosing the right one.

Be One Step Ahead to Avoid Financial Pitfalls

If the collapse of Silicon Valley Bank and Signature Bank have taught us anything, it's that it's better to be proactive rather than reactive when it comes to securing your organization's finances. There are many ways your organization can be one step ahead to avoid any potential pitfalls.

Maintain Multiple Banking Relationships

It’s important to remember that the FDIC insures up to $250,000 per depositor, per ownership category, per bank. Up until now, there hadn’t been a major bank failure since 2008, allowing organizations and individuals to forget the risks.

To protect your organization's finances, having accounts at multiple banks and spreading out your deposits and loans is a good idea and provides a safeguard.

Consider a Sweep Account

If you’re concerned about bank instability,  you may want to consider the benefits of a sweep account to safeguard your company's assets. A sweep account helps mitigate the risk of loss by automatically distributing excess funds over the FDIC insurance limit of $250,000 per depositor, per bank, for each account ownership category.

By allocating funds across multiple accounts or even different banks, you effectively reduce your company's exposure to a single financial institution's potential collapse. In addition to offering protection through diversification and maximizing FDIC insurance coverage, sweep accounts provide an automated, efficient and customizable solution for optimizing cash management during volatile economic periods.

Reevaluate Your Cash Management Strategy

To achieve and sustain optimal financial health, no matter what happens, organizations must remain vigilant about their cash management process, liquidity needs and current strategies. It is imperative for financial leaders to conduct a thorough analysis of their cash flow requirements and reevaluate their cash management policies and procedures to ensure that they are operating efficiently and effectively, while minimizing financial risks. This involves critically assessing the flow of cash within their business operations and identifying potential areas of improvement to better manage cash inflows and outflows.

One strategy to consider is securing pre-approved lines of credit with reputable banks prior to facing a liquidity crunch. By establishing these credit lines in advance, your organization will have immediate access to necessary funds when the need arises, without the delay of obtaining approval during a crisis.

While there are costs associated with maintaining unused lines of credit, it is important to weigh these expenses against the potential long-term savings and operational benefits they may provide. Rather than solely focusing on risk management, this approach enables organizations to strategically invest in safeguarding their financial futures and maintaining a competitive edge in the marketplace.

Let us Help Your Organization Find Financial Stability

At CBIZ, we understand the importance of cultivating strong and reliable banking relationships to ensure your organization's financial stability and success. If you have concerns about your current lender or are seeking to explore alternative options, our team of experts is here to help. Our credit risk experts will work closely with your organization to reassess your credit facilities and determine the most suitable solutions based on your unique needs.

Whether it's identifying the need for increased liquidity or exploring different banks and lending arrangements, we are committed to providing comprehensive guidance in reviewing and optimizing your banking relationships from a lending perspective. Contact us today.

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