Last Friday, Silicon Valley Bank – which was, at the time, among the country’s 20 largest commercial banks – fell victim to a bank run and collapsed. For many SVB accountholders, this was the first major bank run to occur in their working lifetimes, and it was a wake-up call to what “fractional reserve banking” really means. Over the weekend, depositors had to consider the very real possibility that their accounts would only be insured up to the FDIC’s $250k limits, a very low threshold for many businesses’ operating accounts.
Fortunately for SVB depositors, the FDIC committed to protecting all deposits, even those under $250k – but there’s no guarantee the FDIC would grant this kind of extraordinary relief in the future. Major bank failures are not common, but for this generation of business owners, the possibility can no longer be ignored. Moving forward, what can businesses do to protect their operating funds?
Multiple bank accounts
One straightforward option is to simply open accounts at multiple banks. Of course, you will still be limited in FDIC insurance by the number of accounts you’re able to open (for example, 20 accounts = $5 million in coverage), and managing many accounts could be an operational nightmare. Still, this could be a reasonable option for businesses who can use specific accounts for specific purposes. For instance, one account for payroll, another for inventory purchases, etc.
Some financial institutions offer sweep vehicles where a depositor’s funds are automatically spread across many different banks. It’s worth checking with your financial institution to see if they offer a sweep program. However, make sure you also check on the program’s insurance limit: many programs cap out at $2.5 million or lower, which may not be enough.
With blockchain technology, you can now self-custody funds without stuffing them under your mattress! Admittedly, this option won’t be suitable for many businesses (at least not yet) but may be worth considering if your business is technology-forward, and certainly worth considering if you do business with companies that will accept crypto payments. Do your own research, especially on any crypto assets you plan to hold, as crypto assets can be subject to volatility.