On March 10, 2023, Silicon Valley Bank (SVB) was closed by the California Department of Financial Protection and Innovation, representing the second largest failure of a financial institution in U.S. history.

SVB, whose client base included startups and venture-backed technology and health care companies, had invested its customer deposits primarily into longer-term securities. On Wednesday, March 8, SVB announced it would incur a $1.8 billion loss on the sale of $21.0 billion of assets, concurrently attempting to raise $2.25 billion in capital in response to a potential Moody’s downgrade. The next day, depositors rushed to withdraw their funds, causing SVB to shut down after concerns about its liquidity and solvency.

Though the collapse has taken a toll on smaller banks, like First Republic Bank and the Signature Bank failure, it’s still too early to understand how widespread that damage will be. The regulatory response has so far been quick, and experts believe these decisive actions from regulators’ efforts will likely prevent further financial contagion. But markets remain on edge. The consequence of widespread bank failures is a decrease in consumer spending and business investment because there’s now fewer banks to lend money. There is also less money to lend, partly because people are hoarding it in the form of cash. SVB’s collapse is a reminder of the uncertainty plaguing our current economy, and the resulting market instability is reminiscent of the events that triggered the 2007 - 2008 financial crisis.

So, what now? What does this mean for banking regulations? And how does this impact the financial system as a whole?

A Review of the Impacts: Repercussions, Regulations and Programs

Over the past few years, the Federal Reserve has raised rates at its fastest pace in decades. As interest rates rose, these longer-term securities that SVB had invested in significantly lost their value. This is a classic asset-liability mismatch.

But let’s rewind. In 2018, before SVB was considered the 16^th biggest bank in the U.S., the Trump Administration rolled back Dodd-Frank regulations and raised the asset threshold for banks subject to enhanced scrutiny, like stronger regulations and stress tests, from $50 billion to $250 billion. With $209 billion in 2022, SVB was just under the threshold, foregoing the regulations that had been originally placed for large banking institutions. Once SVB couldn’t offset their $1.8 billion hit on the sale of some of their securities, venture capital firms advised their companies to pull their funds from the bank.

Now, The Fed has been working to back businesses’ funding at an extraordinary rate. On March 12, the Federal Reserve Board announced the Bank Term Funding Program (BTFP) to provide $25 billion worth of funding aimed at protecting banks and other depository firms. The funds will assist in giving eligible banks enough liquidity to cover their customers’ needs during these times.

As SVB’s branch offices reopen, depositors will be given a “Receiver’s Certificate” for the uninsured amount of their deposits. The FDIC has been working to pay some of the uninsured deposits as early as this week, with additional dividend payments to come as assets of the bank are liquidated. 

We will continue to see a tightening in monetary policy from this collapse, but businesses should stay vigilant to the shock that can cause severe financial and economic disruption. It’s best to stay prepared and ensure your operations are in order.

Keeping Your Operations Safe

The Biden Administration has made it a priority to investigate the collapses of Silicon Valley Bank and Signature Bank. In response, the Justice Department and Securities and Exchange Commission are in the early stages of their inquiry. In his address to the nation, President Biden suggested, “those responsible will not be protected.” For companies, being proactive, transparent and communicating with your customers immediately will be vital.

Prioritize Cost Containment

While employers cannot prevent a potential recession, they can take action to prepare for the impact it may have on their financial health. One area in which small changes can result in big savings without compromising retention and recruitment efforts is employee benefits. There are countless innovative strategies that can help your organization contain costs, such as alternative funding mechanisms, reference-based pricing, health care captives and more. Now is the time to prioritize your bottom line and set your organization up for post-economic slowdown success.

Don’t Bank on Your Leadership’s Expertise

Historically, 30% of all banks that collapse see litigation brought against the institution’s officers or directors. Therefore, it should be no surprise a class action lawsuit was filed Monday, March 13, 2023, against Silicon Valley Bank’s parent company and leadership. Shareholders are seeking unspecified damages against SVB Financial Group, Greg Becker, and Daniel Beck, former chief financial officer.

While the directors and officers of these financial institutions may not be shielded, your organization can provide Directors & Officers (D&O) Liability Insurance to safeguard senior leaders. Due to their personal liability risk, protecting boardroom leaders can be challenging. Ensure both your officers’ and company’s wellbeing by incorporating a D&O policy into a comprehensive risk financing strategy.

A D&O policy specifically provides coverage for a wrongful act (e.g., actual or alleged error, omission, misleading statement, neglect, breach of duty). It offers defense costs and indemnity coverage to the entity listed on the policy declarations including:

• Individual directors and officers.
• Reimbursement to the organization for a contractual obligation to indemnify directors and officers.
• Protection for the organization or entity itself.

In today’s business climate of corporate transparency and accountability, officers and directors face a multitude of employment-related exposures. Connect with CBIZ Insurance Services, Inc. to ensure your business and senior leaders are protected.

Prepare a 13-week Cash Flow and Annual Financial Projections

Assuming a line of credit will no longer be accessible, determine whether your company has adequate cash flow to cover costs in the coming weeks and months. Identify areas for cost cutting and operational improvements.

Additionally, identify and counteract liquidity bottlenecks before they happen. You can consult with legal counsel regarding your rights pursuant to your existing credit agreements and consider negotiating new terms or seeking new sources of credit. Review and analyze financial and non-financial covenants on any credit agreements. It may also be pertinent to speak with investors and other funding sources to identify opportunities to obtain additional capital and/or financing.

We don’t know yet if the consequences of this collapse and regulatory changes will surge throughout the U.S. regional banking sector with more seizures and shutdowns coming. It does seem inevitable that some banks will need to pull back on lending to shore up their balance sheets, and we’ll likely see stricter capital standards for banks.

This article was written by Charles Berk, Lead Managing Director of CBIZ Corporate Recovery Services, and Nicholas DiModica, Supervising Senior in CBIZ Corporate Recovery Services. 

Copyright © 2023, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly traded and privately held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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