On Friday, March 10th, major headlines around the world announced the failure of Silicon Valley Bank (ticker SVB) and the largest bank failure since Washington Mutual in 2008. Understandably, this made investors nervous, including nonprofit leaders and board members even though many did not hold deposits with SVB directly.
The question on their minds: “Our my bank deposit accounts at risk now? Were other, regional or community banks that we use at risk too?”. On Friday, the stock exchanges halted trading for several banks: First Republic Bank (FRB), Signature Bank of NY (SIVB), Western Alliance Bank (locally known under Bridge Bank) and PacWest Bancorp (known in LA under Pacific Western Bank).
However, this experience is different than 2008 when some banks had risky and levered investments on their balance sheets. SVB was invested in relatively low risk investments such as treasury bonds and mortgage-backed securities. However, SVB’s risk management approach, niche clientele, combined with a rapid rising interest rate environment were the impacting forces this time around. We will learn more in the coming weeks. For a detailed, technical explanation of SVB’s strategy, you can read more here.
So what does your nonprofit learn when banks fail? Three lessons come to mind:
1) Manage Risk: You will hear Fairlight say this over and over. Managing risk is a key management tool for all nonprofits. It allows Nonprofit Leadership and the Board to take appropriate risks when it comes to the Mission of the organization. Over the coming months, we will learn more about what happened at each of these banks and new types of risk reports along with banking regulations will come about. For now, your nonprofit can learn from this experience and perform a risk assessment and resiliency check on your organization. Feel free to reach out if you would like help or to discuss further.
2) Update or Create a Liquidity Policy: We often hear nonprofit leaders ask us how much Cash-on-Hand or Operating Reserves they should hold. While there are “rules of thumb” quoted in nonprofit literature like the article here from Candid., we at Fairlight feel reserves can be more customizable for nonprofits based on 5 areas: Revenue-generating processes, Facilities Management, Staff Leadership, Program Operations & Technology Control. Some nonprofits have very steady revenue-generating processes, low-risk facility management issues, well-maintained program operations, strong and stable staff leadership and updated technology. These nonprofits may benefit from a much smaller cash-on-hand account and reserve accounts. They may even be able to spend more on innovation in their organization. Others may have big challenges in one or more of these areas and may need to hold bigger and longer time horizon cash reserves.
3) Diversification, diversification, diversification: This was true in 2008 and is true now. Whether it is in your long-term board-designated / endowment fund or in your reserves / liquidity account, your portfolios should be diversified. We have been repeating this mantra for some time with the long-term portfolios and go into our Global Market Portfolio philosophy here. For shorter-horizon and reserve accounts, it is still important for some level of diversification at the account AND investment level. Are you in CDs? Are you in treasury bills, notes or mortgage-backed securities? Have you reached the FDIC-limit at your bank? The crisis of 2008 has become a distant memory for some nonprofit leaders and board members. In some cases, they may have still been in school during that time period or focused on other things so not aware of the banking crisis issues during that time. We know some nonprofit leaders have been sitting on cash in their bank accounts as interest rates were so low for a long time.
Nonetheless, it is important to know and understand FDIC limits, your brokerage account’s SIPC insurance, your custodian’s relationship to or affiliation with a bank and how those cash sweeps are handled. As your advisor, we can and will answer these questions for you. Some specific information from our custodian about there balance sheet was released today and can be found here.
So what is next? The Fed has stepped in and agreed to make all depositors at each of the banks whole, both insured and uninsured. Unfortunately, the equity and bond holders of these publicly traded banks will likely have total losses. We do know this coming week will be full of discussion, more questions, some angst and some ups and downs. The benefit of watching this is nudging you and your leadership team into taking stock of your own risks, liquidity policy and diversification.
Reach out to Fairlight if you want to discuss in more depth.
Talk to the financial experts at Fairlight Advisors to learn more about managing your nonprofit’s investments. Schedule a free consultation today!
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