Well, it’s happened. A regional bank failed and others are struggling. What does it mean for a bank to fail? It means the bank cannot fulfill its obligations to depositors or borrowers. While bank failures are rare, we are again reminded that they do happen. Since the year 2000, over 500 banks have failed, the majority during the great recession of 2008.
Why should nonprofit leaders care about this? Many small to midsized nonprofits keep their emergency reserves in a checking account or savings account. Or maybe in a CD. These account balances can reach in the hundreds of thousands and sometimes millions of dollars. In the event of a bank failure, only $250K per account holder is insured by the Federal Deposit Insurance Corporation or FDIC. While there’s been talk of the Treasury Department taking “additional action” to protect smaller financial institutions, this is not something nonprofits should always count on.
For that reason, a nonprofit with a robust financial plan will ensure that the organization’s cash reserves are fully insured BEFORE an economic crisis, either by:
Open accounts at multiple banks to receive the full insurance coverage.
This is an easy solution for deposits that are only slightly above the insurance coverage and allows for easy access to cash. However the approach can become unwieldy for very large amounts above the insurance limit.
Investigate technology platforms that spread deposits or CDs purchases across several FDIC-insured banks.
This is a good solution for large amounts. In the case of CDs, buyers looking for higher income will sacrifice liquidity or ready access to funds without facing a penalty as with all CDs.
Deposit cash in a Money Market Account (MMA).
An MMA is a mutual fund that invests in short-term, income-generating securities while preserving your original deposit. Yields may be lower than CDs but if access to cash is critical, MMAs may be preferable as they have some check-writing privileges among other benefits.
Invest in a Treasury Bill.
A treasury bill or t-bill for short, is basically a loan to the U.S. government that matures anywhere from a few days to one year. T-bills can be purchased in denominations of $1,000 directly from the Treasury Department or from another t-bill holder through a broker. T-bills are backed by the full faith and credit of the U.S. government, which means that the government promises to pay the full-face value of the bill when it matures at a particular date. However, if the t-bill must be sold prior to the date the security matures–for example in the event the nonprofit needs ready access to cash–it might be sold at a loss in a rising interest rate environment.
So if your nonprofit has hundreds of thousands, or even millions, in the bank and needs easy access to those funds, it’s always best to assess your cash needs, determine how accessible that cash needs to be and diversify your options.
Talk to the financial experts at Fairlight Advisors to learn more about managing your nonprofit’s investments. Schedule a free consultation today!