In thousands of discussions at the top of American businesses over the weekend and on Monday, CFOs were talking with their bosses, their peers, board members and advisors, and all coming to the same conclusion: They were glad not to be in the same boat with Silicon Valley Bank when the California-based financial institution became the second-biggest bank failure in U.S. history last week.
CFOs and their associates also agreed on another thing: They want to make sure their companies are never in the same boat. So, a major part of what they’ve been sharing is ideas for how to avoid the same fate as SVB, its leaders, its shareholders and many of its customers.
The Biden administration made sure SVB’s failure didn’t become a global financial contagion, partly by guaranteeing all deposits in the bank beyond the Federal Deposit Insurance Corporation coverage of $250,000 per account. Damage also was contained from the ends of two other banks that have operated on the fringes of the financial industry, in cryptocurrency: Silvergate and Signature Bank. These mitigations avoided setting off potential macroeconomic dominoes like those that fell after the demise of Lehman Brothers in 2008 set off the Great Recession.
Silicon Valley Bank also suffered from some characteristics and practices that made it easy for CFOs to embrace a bit of schadenfreude and figure the banks they do business with never would suffer the same kind of demise. SVB lent almost exclusively to digital-tech companies, both huge established outfits and many startups, with exposure to a single vertical that was almost unmatched by any other U.S. bank of scale. And the company’s financial-management practices left it uncommonly exposed to damage from the Fed’s two-year program to spike interest rates.
Still, from the degradation of the U.S. banking sector over the last couple of weeks, CFOs were digesting some lessons for their operations and their leadership that will help them going forward. Here are six of them:
You don’t need to panic—really. Some post mortems are saying that one of Silicon Valley Bank CEO Greg Becker’s biggest mistakes was to tell depositors on Thursday, “The last thing we need you to do is panic”; after that, the run was on.
“In all the conversations I’ve had with CFOs and CEOs since Friday, family offices and businesses, generally they wanted to hear some comforting words about the situation,” said Russ Holland, CEO of Fieldpoint Private Bank. “They wanted to hear about the differences between our bank and the ones that have been in the news.”
But CFOs and others said it is pretty clear the federal government will not allow the problems of the three banks to infect the mainstream of American business and economic life. “Take a deep breath,” said Ted Gavin, managing director and founding partner of Gavin/Solmonese and former president of the American Bankruptcy Institute. “SVB had its share of problems, and they were really small and concentrated.”
John Asbury, CEO of Atlantic Union Bank, was more declarative. “You should have faith in American banks and the banking system,” he said.
Even SVB depositors and loan holders are supposed to “get taken care of, but it will be a matter of time,” said a member of the CFO Leadership Council, a network affiliated with Chief Executive Group that saw about 300 corporate financial leaders, many with connections to SVB, join a Zoom discussion of the SVB situation on Monday. “You’re dealing with a receivership [now], not a bank. On the debt side, a lot of those debts hopefully will be purchased.” (Another meeting is planned for Thursday at 1:30 p.m. ET. If you’re interested in becoming a member of CFOLC and joining the conversation, click here or reach out directly to president and founder Jack McCullough, who will moderate the session.)
Safety is crucial now. In a flurry of activity that has even had senior banking executives opening new accounts for business customers after decades away from the floor, CFOs are guiding their companies to places for their capital that they believe are secure.
“Generally, if you hear investor chatter—which drives company behavior—it’s all about a move to safety,” said Chen Amit, CEO of Tipalti, a provider of financial-automation software. “‘Safety’ is major banks at the moment, and that’s where people go. And if they came from a bank that’s at risk or not isn’t material; it’s their perceptions that are material.”
This means JPMorgan, Citibank and Bank of America presumably are seeing huge inflows of funds. “The safest place for money now is one of those three banks,” said a member of the CFO Leadership Council.
And traditional banks without the keen kind of specialization SVB had are in favor. “I would be leery of rapid-growth, non-traditional banking models such as SVB’s,” Asbury said. “And they’re not representative of most banks in America.”
More than size matters. Regional strongholds and community banks may have particular appeal now as well, especially to mid-market and smaller companies. For one thing, said a member of the CFO Leadership Council, regional banks are easier places to get new accounts than many larger banks.
“Big banks may have fortress balance sheets, but you don’t really know what’s on them,” Holland noted. “They’re complex. And you’re not going to be able to have a conversation with the CEO about your accounts. You can do that with a regional bank and a community bank.”
Regional banks “have enhanced risks because of regional concentration but their noses are closer to the ground and you can do more scrutiny of them,” Gavin said.
And CFOs should assume the federal government will continue to promote the viability of smaller banks amid whatever reshaping of the system follows the current troubles. “I don’t think the government wants four banks just to control everything,” said John Pennett, partner in charge of the tech and life sciences industry practice for EisnerAmper consultants. “There are opportunities for regional folks and other banks outside money-center banks.”
In any event, diversify. Spreading banking relationships beyond their current status is always a good idea and even more so now. Diversity just for the sake of diversity should be an end in itself, said Fariborz Ghadar, a management professor at Penn State University.
“There’s a level of redundancy that you want to have,” Amit said. “If working with one bank was OK for you before, diversify. The more you grow, the more you need to include redundancy on the banking side.”
One member of the CFO Leadership Council said she was dealing this week with the disadvantages of reliance only on SVB when it came to corporate credit cards for traveling executives and managers. “We had people at our most important trade show of the year, and by Saturday night, SVB was shutting down their credit cards,” said the CFO of a med-tech startup.
Double down on due diligence. “CEOs and CFOs should be exploring with their bankers what the differences are between their bank and Silicon Valley Bank,” Holland said. “We have prepared messaging for our clients about being well capitalized with a good liquidity position, and the comparative metrics of our position with other strong banks as well as the ones that are in the news so they can see mathematically how we compare.”
Gavin advised, “CEOs and CFOs have to be active participants in banking relationships. Know your banks and what they’re invested in and what their deposits are backstopped by. It’s all readily available in reports.”
Watch for the best—and the worst. Crisis brings out the true colors in business partners as well as people.
“This has been a nice opportunity for some folks to shine,” Pennett said. “We’ve seen examples of some VC firms being gracious to portfolio companies and saying send me your [funds] and we’ll send the money back to you when you’re ready, if you need short-term facilities. State governments have stepped up too.”
On the other hand, Pennett said, “Some sharks in the water have been saying, ‘We’ll bail you out for a 20 percent usury rate.’”
And at the same time, SVB’s debacle has brought out financial criminals like sharks to chum. “Phishing is real; it’s not theoretical,” said a CFO Leadership Council member. “It’s happening.”
Indeed, Amit added, “This is an incredible opportunity for fraudsters. Everyone needs to be very careful. Now that suppliers are giving instructions and telling customers not to send payments ‘to my account at SVB; send them to me in my new account,’ people need to be very careful. Call the supplier directly and start with the main [phone] line, reach out to the right person and validate it in an independent way.”