As the banking industry continues to adjust to the fallout from the collapses of several banks, including Silicon Valley Bank (SVB) and Credit Suisse, many businesses who bank with community and regional banks are unsure of how to proceed. Uncertainty abounds as the market decides whether the steps that have been taken to combat this wave of bank collapses is positive or negative. In this time of uncertainty, it’s more important than ever for businesses and individuals to make clear-headed choices that build financial security and are based upon good projections and a solid diversification strategy, rather than rash, emotional decisions inspired by fear and unease.
Key Takeaways:
- Most community and smaller regional banks utilize programs like CDARS and ICS. While other banks may use ADM Co. or MaxSafe, CDARS and ICS are by far the largest group
- Opening accounts with multiple banks may not be convenient, but it may offer better rates
- Credit unions are insured by NCUSIF, which is similar to FDIC
- While investing in brokerage accounts is a sound strategy that allows diversification, it’s important to remember that funds are subject to market risk
Diversification Strategies in an Uncertain Banking Environment
The best thing a business owner can do at this time is maintain a sound policy around safety and focus on running your business. This mindset can help your company block out the noise as media reports spark potentially unwarranted unease and fears and allows the industry to heal without any interruption to your business. Project current cash needs and diversify the rest of the available funds. There are several ways to do so to meet your liquidity needs through laddering strategies and diversifying deposits to take advantage of the best rates possible.
Ladder Deposits in IntraFi’s CDARS and ICS Programs
Many community and smaller regional banks use programs like Certificate of Deposit Account Registry Services (CDARS) and Insured Cash Sweep (ICS), both of which are owned by IntraFi. ADM Co and MaxSafe are similar programs used by the same types of institutions, but CDARS and ICS are the largest. In Missouri, Illinois and Indiana, there are about 600 banks that subscribe to these programs, which are also available nationwide.
CDARS is a network of banks in which certificates of deposit (CDs) are placed by your bank to obtain insurance coverage. ICS operates in much the same way, but instead of CDs, the funds are placed into money markets and checking. You receive a single statement where all the deposits are placed or have online access as though the deposits are in one place, rather than spread around.
While this is a very safe option for deposits, the rates available through this method are not necessarily the top rates. To be fair, you can very rarely have both a lack of risk and a high rate of return. This strategy does allow you to ladder deposits to access different maturities to meet your liquidity needs.
Deposit Funds into Multiple Banks, Consider Diversifying into Credit Unions
Another option some businesses may want to consider is manually placing deposits into other banks the “old-fashioned” way. By opening accounts with multiple banks, you may be able to access better rates, but this could be inconvenient and time-consuming. You should also consider depositing funds into credit unions. The National Credit Union Share Insurance Fund (NCUSIF) insures credit union deposits and is comparable to the FDIC, making it a relatively risk-free place to open an account.
Strategies for Excess Funds – Move to Brokerage Accounts
To further diversify your excess funds, move them to brokerage accounts. A laddering strategy is crucial here as well to ensure you have liquidity when you need it. Although this is a very sound strategy that allows for diversification, it’s important to remember that all invested funds are subject to market risk. Past performance is not necessarily indicative of future results.
Strategies for Personal Deposits
While the above strategies work best for business deposits, personal deposits can be titled in different ways and are much easier to insure above and beyond the $250,000 limit. For more information on personal deposits, please visit the FDIC website.
Ultimately, pursuing a good cash flow projection and diversification strategy is a business’ best option. In the coming days, weeks and months, there will be no shortage of noise that threatens to confuse and frighten people who, more than ever, need to feel cool, collected and secure. The industry can and will heal, while it does so try to keep the interruptions to your business focus to a minimum.
We recommend working with your team of advisors, including bankers and CPAs, to determine the best strategy for your business. Contact Anders below to learn more about how we can help and the associated fees.
