Keep Your Bank Deposits Safe
How treasury teams can mitigate risk to deposits above the FDIC insurance limits.
Turmoil hit the midmarket banking sector a little more than a year ago, leading to the collapse of several banks and corporate trepidation about the risks their banking counterparties pose.
Today, the sector has largely stabilized. Still, as the Association for Financial Professionals (AFP) found late last year, many treasury teams are moving their cash away from bank deposits and into T-bills and government or Treasury money-market funds (MMFs). Other organizations seem to be moving funds away from small and midsize banks and into the largest institutions, as banking activities go increasingly digital.
To get a sense of the ongoing risks to corporate deposits—and the various ways to mitigate them—Treasury & Risk talked to Reid Thomas, chief strategy officer at Ampersand, which offers a solution for spreading deposits across multiple banks.
Treasury & Risk: Obviously, the midmarket banking sector went through some turmoil a year ago. Do you still see vulnerabilities there?
Reid Thomas: Yes, and the issues I see now are different from what we’ve seen before. First of all, midmarket banks often find their path to success by catering to certain industry verticals. Companies increasingly want their banks to understand the business they’re in and to have solutions and expertise available to help them. That’s difficult for large banks because large banks have so many customers across so many verticals that they can’t offer highly specialized services at scale. So, for some treasury teams, banks in the midmarket are a better option because those banks can better respond to their specific needs.
The issue is that banks which specialize in certain areas become concentrated on those specific verticals, which makes them more susceptible to the ebbs and flows of those industries. We’re seeing that right now with banks that specialize in certain commercial real estate sectors. If they focus on office and retail spaces, they may be realizing they have an overabundance of deposits and clients in that area and they’re not as diversified as they should be.
Historically, folks have looked at the different ratings agencies and some of the different metrics and ratios banks are forced to publish, and said, ‘The bank’s well-capitalized, so we are safe.’ But a bank could be very well-capitalized, yet still be in a market sector that is about to get into trouble. It’s overconcentrated. And that’s a little harder to see when you’re looking at the bank. Given that many banks have grown up this way, there’s economic turmoil across multiple sectors, and we have high inflation and possibly a coming recession, I think we’re going to see more and more of these problems.
T&R: What should treasurers who do their banking with smaller banks be looking at to see whether any red flags are on the horizon for them?
RT: A lot of things they used to do are still valid. Looking at what ratings agencies say is important, although I think the ratings agencies let companies down with some of last year’s bank failures. Their reports on capitalization levels are helpful, but they need to dig deeper into a bank’s concentration of clients and what industries it’s serving.
Beyond ratings agency information, treasury teams have to make some judgments on their own as to where they see a bank’s primary industry sectors going and how stable those sectors are. That’s tough to do. If you’re a venture capital company, for example, you want to put your money in a bank that specializes in that industry. And 15 months ago, all roads in that space led to Silicon Valley Bank. Fortunately, when it comes to today’s problematic sectors, like commercial real estate, there are more banks in the game. Still, some of the smaller banks that provide the best service for real estate customers have very heavy concentration risks.
Digging into those details is really important. And then treasury groups should explore alternative places to put their money, or ways to spread money out so that more of their total deposits are protected by the FDIC.
T&R: When you advise digging deeper into banks’ industry concentration, where can a treasury team get that information?
RT: Asking the banks is a good starting point. Digging into the concentration of deposits in earnings-call reports helps, but treasury’s research needs to be more nuanced than that. Commercial real estate is the hot button of the day, but commercial real estate consists of residential, multifamily housing, office, retail, hotels, resorts, etc.—a lot of different categories, some of which are doing well. So it’s really about, if a bank says ‘Our commercial real estate deposits are X,’ asking whether those are all office spaces, which would present a very different scenario right now than if they’re multifamily units. That sort of information isn’t always in the call reports, so those are important questions the treasury group should be asking their banks.
The other thing to look at—and this became apparent in Signature Bank and Silicon Valley Bank—is what percentage of the deposits are uninsured at any moment. If those two numbers are high—if, for example, a bank currently has a high number of commercial deposits in the office or retail real estate sector, and if its number of uninsured deposits is fairly high—there’s some risk there. The minute something starts to trip in the industry, people are likely to try to protect their deposits by moving them.
T&R: What are a corporate treasurer’s options for increasing the security of their deposits?
RT: Well, historically, there hasn’t been a lot of innovation on the deposit side of banking. There’s been lots of innovation on the lending side and lots of innovation on the payment side. But it’s odd: The bedrock of all banks is deposits, and there’s not a lot of innovation there.
A corporate treasury department is typically going to get a lower interest rate as a result of choosing this type of product, because the fees the bank pays to be part of the network reduce the rate it offers the customer. But the benefit is that the treasury team deals with the same bank they would otherwise be working with and the network takes care of all the complexity. If a treasury team is interested in this approach, they could just ask their bank whether it has an insurance protection product or cash sweep product—these solutions go by various names.
Another thing treasurers could ask their banks about is having the bank put bonds or collateral in place against a specific deposit. So they could leave all their money at one bank and pay what is essentially an insurance premium to guarantee the deposit beyond the FDIC’s $250,000 limit. Or, I suppose, they could procure those bonds themselves. That might be pretty expensive, but when interest rates are high, it might be worth doing.
A third option would be for the treasury group to diversify deposits across banks on their own. There are treasury management systems that can help treasury teams administer and manage that, so they don’t necessarily have to do it all in Excel spreadsheets. That’s an option.
And then, finally, treasury groups could work with a nonbank provider that offers this kind of diversification as a service, which is what Ampersand does. We’ve built a network of several hundred banks, and we’ve built technology that optimizes where deposits get placed. We understand the banks’ appetites for deposits and their safety parameters, and we align the deposits based on the depositor’s stated preferences for security and safety, rates, and even their environmental or social values.
So treasury teams have multiple options to protect the integrity and safety of their deposits.
T&R: A lot of companies focus their deposits with a relationship bank that is also their lender. What can they do in that situation?
RT: To me, this is a big area of opportunity for regulators and for some thinking around solutions. Because that approach is, in effect, creating the uninsured-deposit problem. Everybody needs credit from time to time. And if you’re forced to have your deposits at a specific bank to get the credit—which is standard practice—then protecting your deposits is going to be tough. A lot of commercial loans are north of $250,000, which means the required deposit amount will also be that size. That creates exposure on funds that are not FDIC insured.
I think companies in that situation should insist that the bank place those deposits in a solution that gives them 100 percent FDIC coverage. The bank could go out and work with folks like us or could use one of its own products to push the deposit into banking networks. This approach has a cost, of course, so it might not be what the bank offers right off the top. But if you’re asked to place a big deposit in exchange for a loan, I think you have some leverage to insist that the bank protect your deposit through one of the methods we’ve talked about.
See also:
- Big Banks for Better Service?
- Investments Shift away from Bank Deposits
- Planning Liquidity in Times of Uncertainty
T&R: In a lot of cases, midmarket banks might offer a higher interest rate as well. To what degree does that offset the cost to the treasurer of spreading their deposits across an assortment of banks?
RT: The impact can be massive. The bigger the company, the larger its typical deposit will likely be, so a small movement in rates can translate to a material amount of interest. And that’s money that drops right to the bottom line as additional income.
When you’re investing, you make decisions about where you’re going to place your funds. You choose the investment managers and whether you’re going to buy stocks, bonds, or other assets. The common wisdom from wealth managers is that investors should diversify to protect themselves because different individual stocks are going to go up and down at different points in time. Over the long haul, investors are better off being diversified, even though they might be able to make more money in a single stock at a given point in time.
The same philosophy holds in deposits. Banks’ appetites for deposits change. At one point, they might be looking to increase deposits and paying more aggressively. At another point in time, they might offer lower rates relative to their competitors. By having deposits diversified, over the long run they can boost their return on those deposits.
T&R: Are there any other factors that treasury groups should consider when deciding how to manage their cash deposits?
RT: Well, one other thing that I see becoming increasingly important to some companies is the notion of impact and values. For example, if an organization has a mission to reduce its carbon footprint, then it may want to align all its resources—potentially including its deposits—with partners that are less friendly to fossil fuel companies.
Younger people are more frequently expressing that they want to do business with companies that align with their values, and we’re seeing the results in real time with people boycotting companies for one reason or another. That’s a risk treasury folks should be thinking about. They’re increasingly getting pressure from their shareholders and customers saying: ‘Are you walking the walk, or just talking the talk? Where is your money invested? What projects are you investing in? Who are your suppliers?’ And I think the next questions on the horizon are: ‘Where are you putting your deposits? Is your cash sitting in banks that are counter to your mission?’