As you have been going about the day-to-day operations of your small business this past month, you may have noticed people talking about the recent bank failures and the threats to the financial and banking system from rising interest rates. Headlines from the news, such as the collapse of Signature Bank, based in New York, and Silicon Valley Bank (SVB), based in Silicon Valley, may lead you to be concerned about the financial health of the bank that you hold your small business accounts at.
In addition to bank failures, you may have heard rumors about the resilience of the banking system and banks with troubled balance sheets or depositor behavior, such as Credit Suisse or First Republic Bank. After the Fed and regulators have tried to stop bank runs at more banks, attention has turned to banks like First Republic Bank, based in San Francisco, California, to see if the federal government’s policy will provide First Republic Bank with enough liquidity to be able to cover its deposits as people panic withdraw.
This attention precipitated with coverage in outlets like Bloomberg and CNBC, monitoring First Republic Stock as their credit rating was downgraded and their bank stock declined sharply last week.
At the same time that federal regulators, lenders, and Wall Street watch the health of First Republic Bank from afar, there are many people and businesses, including a number of small businesses, that depend on First Republic Bank for their banking services. Many of these small businesses are also uninsured depositors. This is because their total deposits may be above the FDIC threshold to be insured.
Both small business owners whose businesses are clients of First Republic Bank and small businesses in the United States, in general, should be concerned about the implications of the rescue of First Republic Bank and what it means for the operation of their businesses.
The good news is that you have come to the right place. In this post, we will review what led up to the fear surrounding First Republic Bank, how the fear is affecting small businesses, government efforts to protect small businesses, the rescue brokered by some of America’s largest banks, what the rescue means for your small business and the things that you can do to protect your small business amid the turmoil in our financial system. We will cover the following topics in detail in this article:
The central problems which created the concern surrounding First Republic Bank’s ability to protect itself stem from the earlier bank runs that occurred with Signature Bank and Silicon Valley Bank. These two bank collapses, however, were spurred by earlier economic problems that have been fomenting for years.
The easiest explanation for how this crisis precipitated likely dates back to 2008. Since the 2008 recession, the United States has been in a low-interest rate environment maintained by the Federal Reserve. For a long time, this put a lot of expansionary pressure on the economy. US treasuries, which are typically safe investments for banks to hedge their money in, paid a low-interest rate due to the low-interest rate environment.
As the COVID-19 pandemic hit, the Fed decided to keep interest rates low for fear that raising interest rates might lead to a full-blown recession. As the US government responded to the coronavirus pandemic, inflation started to creep up. The Fed was hesitant to raise interest rates, and inflation increased further due to the damage that this might cause to businesses and other investments. By the time inflation had set into the economy last year and harmed unprepared businesses and consumers, the Fed needed to raise interest rates quickly. By hiking these interest rates quickly, the yield on bonds skyrocketed. This made buying a bond more valuable now, but it quickly devalued bonds that bondholders had bought previously.
This problem is compounded by the fact that US treasuries are often a popular investment for banks. Given the volatility of the stock market and other investments during the pandemic, many US banks bought US treasuries when they had low-interest rates. As a result, in recent months, their assets have dropped substantially in value. This has presented a significant risk to the banking industry.
In addition, the low-interest rate environment encouraged banks to make slightly riskier investments since the cost of capital was relatively cheap and borrowing was much easier. As a result, banks like Silicon Valley Bank and crypto-focused banks made risky loans that later contributed to problems for their balance sheets.
In total, this led to the collapse of three banks in the last month. The collapse of Silicon Valley Bank was the largest of them and the largest bank collapse since 2008.
Since the collapse of these banks and the news of the collapses reached headlines and people around the country, many have rushed to banks to withdraw their money or move it to larger banks. One of the banks which were particularly vulnerable to this was First Republic Bank. This is because First Republic Bank is a regional bank with a lot of similar exposure factors geographically and investment-wise as Silicon Valley Bank.
Depositors began to go to First Republic Bank particularly to withdraw their capital, despite the statements from the bank that their balance sheet was in good financial health and that they could cover depositor withdrawals. Despite this, First Republic Bank has accepted a deal from major US banks that will provide First Republic Bank with a substantial amount of liquidity to help cover fleeing depositors.
How the First Republic Bank Fears Are Affecting Small Businesses
As a small business owner, you are likely in tune with how the fears surrounding First Republic Bank affect your business. However, sometimes the daily tasks of running your small business may leave you behind with the up-to-date knowledge on the latest information affecting your small business and how you can respond to issues as they arise.
One of the most immediate impacts of the First Republic Bank fears is fear for small businesses which have deposits at First Republic Bank. If First Republic Bank were to have a bank run, and if your small business were to be FDIC insured, then there would be some headaches involved in retrieving your funds and being able to use the bank accounts that you held at First Republic Bank to make the necessary payments for your business.
However, a bank run at First Republic Bank may also carry some serious implications for your small business if your bank accounts are not FDIC insured. The FDIC, or Federal Deposits Insurance Corporation, guarantees your bank deposits up to $250,000 per depositor per type of account per bank. This means that in the event of a bank failure or bank collapse of First Republic Bank, as long as your small business holds less than or equal to $250,000 in your bank account, you will be covered. However, some larger small businesses and startups may have more than this amount of money in their bank account. This means that the fears which could drive a bank run at First Republic Bank could lead to a bank run that deprives you of the money that you have deposited with First Republic Bank.
However, the fears surrounding First Republic Bank are likely affecting banks that you also hold money at, even if you are not a depositor at First Republic Bank. The greater fears about the health of the banking sector are driving a lot of movement of capital within the banking system from smaller banks to larger banks. As a result, bank runs are much more likely at regional banks. Your small business could be at risk of losing capital which is not insured if banks like these go under.
In all, the trouble in the banking and financial services industry is creating a lot of additional headaches for small businesses. Aside from the already challenging economic factors affecting the operations of your small business, you now need to pay attention to other financial indicators to be sure that your small business will be able to continue to operate without problems.
Government Efforts to Protect Small Businesses
While some blame the government for leading the economy to the situation that we are in, there is some credit that could be given to the government for avoiding short-term disasters for small businesses as well as other banks.
The most recent and visible example of government intervention intended to help businesses is in the aftermath of the Silicon Valley Bank collapse. Since the vast majority of deposits at Silicon Valley Bank were uninsured, there was a large threat of defaults down the line and businesses failing due to losing the cash in their bank accounts. For larger small businesses and startups, the bank collapse may have caused businesses to be unable to pay their employees, bills, or loan payments.
As a result, that could lead to layoffs, loan defaults on banks’ balance sheets, additional bank runs, increases in the interest rate, and compounding circular problems with the financial system.
Washington’s response, through the Biden Administration, to the collapse was very swift and wide-reaching to prevent another financial crisis. The government’s Treasury Secretary Janet Yellen, through the FDIC, agreed not only to ensure the accounts which were guaranteed to be covered but also the depositors who were not covered. This decision from the treasury department, while expensive, likely saved a lot of banks, jobs, and other immediate impacts on the economy.
This allowed small businesses to keep the money that was in their accounts regardless of how much they had initially deposited. This security of funds greatly helped many business owners and startups ensure that they can keep their businesses running.
These types of prior government responses make it easier to assess what might happen or come as a result of the First Republic Bank rescue that we are witnessing unfold.
The First Republic Bank Rescue
In the wake of the other bank shutdowns and anticipated issues with liquidity, as depositors fled First Republic Bank, First Republic Bank began to pursue measures to help their liquidity situation. One of the options that they looked at included a potential acquisition. However, this option did not have to be used. Neither did a government bailout. Instead, a deal was struck with some of the United States’ largest banks.
In a deal totaling $30 billion in uninsured deposits, JPMorgan Chase, Wells Fargo, Citigroup, and Bank of America will make up the majority of big banks in providing First Republic Bank with the liquidity it needs to survive. Other banks are involved in the deposits, too, such as Goldman Sachs, Morgan Stanley, PNC, and Truist. These deposits, while restricting the available capital of the banks, are likely in their interest to avoid problems with bank runs eventually reaching larger banks.
One of the other reasons for this type of rescue is to avoid the problems associated with increased government regulation or scrutiny of the banking industry or the fallout from an extended banking crisis. In addition, many of the depositors who left First Republic Bank with their deposits went to these larger banks. As a result, this deal is merely shuffling around the capital.
While it is likely too early to say for sure, the First Republic Bank rescue deal likely has the ability to save the US banking system from a larger meltdown for a little while. Ultimately, the same underlying economic causes will continue to create challenges for banks. In any case, banks will need to behave more conservatively in their investments moving forward. Current economic times are likely to challenge all parties involved, and adapting to them will be an important step in surviving these conditions.
What the First Republic Bank Rescue Means for Small Businesses
Since the news of the First Republic Bank rescue appears to come at the end of a tumultuous month for US banks and small businesses, you may be wondering what the First Republic Bank rescue means for your small business.
At the simplest level, the First Republic Bank rescue is probably pretty good for your small business. If you have accounts at First Republic Bank, you can be more confident in the security of your funds and be happy that there will not be a headache or delay involved in the migration of bank accounts to a new bank from a bank failure.
As a small business without an account at First Republic Bank, you may also be relieved that the bank run is seemingly ending. This means that in the short term, you will not need to worry about your other bank accounts or the greater implications of a certain bank’s balance sheet for the wider economy.
However, there are some other phenomena that may affect your small business in the long run. While the deal for First Republic Bank was done with deposits at other banks helps your average taxpayer and consumer by not needing to worry about the cost of a bank bailout, there are some additional costs that small businesses may bear inadvertently.
Since many bank businesses will now have capital tied up in deposits at First Republic Bank, $30 billion of capital is being taken out of the economy when it comes to making loans to businesses. This can make getting a loan slightly more difficult, and the cost of a loan should theoretically go up with a limited supply. This supply will likely be limited in the short term, as First Republic Bank will likely use the cash to restore its balance sheet and secure itself in the event of increased fallout.
In all, the First Republic Bank rescue was likely a positive response from the private sector that worked well in the initial stages to save First Republic Bank and its clients. However, this storm is just beginning, and the solution that has been implemented will still need to weather the economic storm.
Ways to Protect Your Small Business
Despite the potential success of the First Republic Bank rescue, it may still be a good idea to protect your small business from the fallout of the financial system volatility we are experiencing. At the same time, learning strategies to protect your small business in the event of a bank run can be a good long-term financial management strategy for your small business.
When it comes to bank runs in the United States, small businesses with a lot of funding do not necessarily have a lot of protection. The protections we have seen in the aftermath of the collapse of Silicon Valley Bank, for example, are discretionary by the federal government, given the importance of the bank and its depositors. The decision that they took in this case, while perhaps setting a type of precedent, will not absolutely protect your small business in the event of a future bank run at a place where you hold an uninsured deposit.
The key, then, is to make sure that your deposits are insured with the available protections as much as possible. Since the FDIC sets an insured amount cap at $250,000, you should consider trying to keep less than $250,000 at every bank where you hold an account with. Diversifying your bank accounts by using multiple banks is also not a bad option. In doing so, you are providing your small business with several accounts from which it can draw its capital if something bad happens to any one of the banks with that you hold accounts with. This helps reduce the risk and exposure that your small business has to volatility in the financial system.
Another strategy in this vein that can be used to protect your small business is to diversify the bank accounts you hold to include both regional and large banks. While regional banks may offer better benefits for your small business to use, larger banks may offer more stability and predictability, especially in chaotic economic times.
When you think about it, depositing your money in a bank account is like making a sort of investment. When you make such an investment, you want to be sure that you diversify your capital and can recover it if something goes wrong. To the extent possible, you should take advantage of available government deposit insurance programs to minimize the operational risks to your small business.
Aside from the longer-term strategies for protecting the financial stability of your small business’s bank accounts, you should pay attention to the news and any information concerning the financial health of the banks with which your small business holds an account. This can help you be aware of issues before they happen and provide you with an opportunity to respond relatively quickly.
Even though small business owners have a lot to deal with already, contemporary financial system issues will likely warrant your attention to make sure that your small business is protected.
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