Many nonprofit leaders are wondering if their organizations’ bank deposits are safe in the current jittery banking environment. And for good reason.
Immediately before Silicon Valley Bank (SVB) was taken over by the FDIC on March 10, one major ratings agency had an “A” rating outstanding for the bank, and another had a “B” rating outstanding. The SVB failure was the second-largest bank failure in US history, according to The Wall Street Journal (WSJ). The WSJ published an article on March 10 (the day the FDIC took control of the bank) with a truly remarkable two-sentence paragraph about the SVB failure: “The bank was in sound financial condition on Wednesday, the regulator said. A day later, it was insolvent.” [Here is a link to the WSJ article; note that a subscription is required to access it.]
Take a moment to think about the implications of that statement. “The bank was in sound financial condition on Wednesday…[a] day later, it was insolvent.” When you see a bank fail in a two-day period while maintaining A and B ratings by major ratings agencies, it logically makes you wonder how any reasonable, prudent person can know whether deposits in any bank are safe.
Fortunately for depositors of SVB, federal banking officials have indicated that all depositors of SVB will be made whole. Federal officials have stated that depositors’ balances in excess of the $250,000-per-depositor FDIC coverage cap will be protected due to the systemic importance of SVB bank. A logical corollary is that one cannot assume that the same will be true for the next bank that fails. Another bank, Signature Bank, also failed recently.
Given the practical limitations on the ability to know whether any bank is truly safe and sound, what can and should nonprofit leaders do to ensure that their organizations’ bank cash deposits are safe? Some people are suggesting that perhaps the only safe banks are the very largest banks in the country…those that the regulators deem are “too big to fail.” If all depositors took that position, smaller local and regional banks would be wiped out, and local banking relationships could be more difficult to maintain. And depending on the size of your organization’s deposit balances, it may not be practical to try to spread deposits among multiple banks keeping balances below the FDIC coverage cap of $250,000 per depositor.
In this article, I am going to address deposits in the banking system. Clearly, there are ways to protect cash outside of the banking system in an investment portfolio…like investing (with the help of a properly credentialed investment advisor) in short-term US Treasury securities or in appropriate mutual funds that hold such securities. But what about cash that your organization simply wants to keep in the bank?
It is generally true that the larger the bank, the more likely it is that federal regulators would deem it too big to fail. So, if your organization wants to bank with a big bank, that could be an appropriate strategy. Bankrate offers a list of the 15 largest banks in the US. It is interesting to note, however, that #14 on the list as of today, First Republic Bank, had a severe challenge in recent days. Bankrate’s website includes an update on First Republic Bank dated March 17, 2023, which states:
It’s also important to note that First Republic recently faced turmoil that threatened its solvency following the collapse of Silicon Valley Bank and Signature Bank. However, 11 of the largest US banks came together to save the bank, depositing $30 billion into First Republic to keep it afloat.
So, the fact that a bank is large…even very large…is not, in and of itself, assurance of the bank’s financial health.
Is there a way to ensure that an organization’s bank cash deposits are safe, even with a local or regional bank? Many local and regional banks would answer that question with a resounding “Yes!” A number of those banks would point to their participation in programs offered by IntraFi Network, LLC (IntraFi). IntraFi’s website describes its two main programs, ICS and CDARS as follows:
Using IntraFi Cash ServiceSM, or ICS®, and CDARS® you can access millions in FDIC insurance for cash deposits from IntraFi® network banks and enjoy the simplicity of banking with just one trusted, local institution. Conveniently and easily secure funds placed into demand deposit accounts, money market deposit accounts, or CDs.
Banks that participate in the IntraFi network allow customers to maintain a relationship with one bank and have FDIC insurance coverage for deposits well in excess of the standard FDIC coverage cap of $250,000 per depositor per bank. The network allows for the larger deposits to be spread among multiple banks in the network in amounts below the $250,000 FDIC cap while maintaining one point of contact with one participating bank. IntraFi offers programs for demand deposit (checking) accounts, money market accounts, and CDs. Participation in the IntraFi program with a participating bank typically carries a fee. The fee can apply as a reduction in the interest rate you earn on your deposit balances. For example, in another recent Alert I wrote about earning interest on your organization’s excess checking account funds, I quoted Texas Security Bank president, Craig Scheef, stating that his bank reduces the interest rate it pays on money market accounts by 0.15% for deposits that participate in the IntraFi program.
The IntraFi website, which says that thousands of financial institutions across the country participate in its programs, has a web page that allows you to find banks that participate in the program as well as an FAQ page. In the current environment, interest in the IntraFi program has increased significantly, according to Scheef.
Nonprofit leaders should pay careful attention to the safety of their organizations’ bank deposits in this environment. One potential solution to consider is the IntraFi network of participating banks that allows depositors to maintain FDIC-insured deposits well in excess of $250,000, with one bank serving as the point of contact.
This article is provided for information only and is not an endorsement. Any organizations or persons considering any strategy to manage the risk of their bank deposits or other assets should perform their own due diligence before taking action.