How to pick a banking partner (and not get caught in a bank run)Mar 15, 2023
Well, things blew up again.
Silicon Valley Bank, the 19th biggest bank in the US, went belly up and was taken over by FDIC.
It is the 2nd biggest bank failure in US history.
So today, we tackle how to pick your banking partners.
Let’s dive in.
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How to pick a banking partner (and not get caught in a bank run)
Last week, Silicon Valley Bank became the 2nd largest bank to fail in US history.
Jamie did a great job explaining it in this Tweet, so I’ll let him tell the story:
By Sunday, it appeared that if no assurances above the $250,000 FDIC-insured amount was given that there was a reasonable likelihood of bank runs all over the nation on Monday morning. With fear mounting, the FDIC came out and said they’d guarantee all deposits, even if over the insurance limit.
While it appears the crisis is behind us, people still feel uncertain.
Not since 2008 has there been so little trust in our banking system and people are asking “what do we do?”
So, today we’re going to do 2 things:
First, I’ll highlight 3 lessons you should take action on from this event.
Second, I’ll look at what you should do to evaluate the health of your current or potential banking partners.
Lesson 1: Always have more than one banking partner.
Most business owners open their account and never revisit this again.
The problem is you have different needs as you grow. You also have more risk.
By opening multiple accounts you:
- Avoid ever having all your money locked up
- Have more partners for debt and other banking services
- Get more FDIC insurance (it’s only $250,000 per bank)
Now, I won’t suggest that you keep your holdings below $250,000 in every account. For many companies that’d be impossible.
But I do think you should think about it strategically.
Besides new accounts, companies like Brex and Mercury offer, which each offer services that provide over $2 million in FDIC insurance with little to no extra work.
I’d also encourage you to seek a little diversity in your partners. Having a mix of local, national, and tech-enabled banks gives you “the best of both worlds” and will help you find the ideal bank for your specific situation.
Lesson 2: Understand how healthy/leveraged your bank is.
Even for me, understanding how healthy a bank is isn’t an easy task. Unless you’re well-versed in banks, it’s not a natural language.
But without understanding how banks work, you’re almost gambling with your money.
When looking at a banking partner, ask:
- Are deposits growing steadily?
- Is their tier 1 leverage ratio > 8%?
- Is their loan-to-deposit ratio < 90%?
- How do these compare to direct competitors?
- Has the Federal Reserve taken corrective actions?
None of these are foolproof. Silicon Valley Bank meets all these criteria except number one. Their rapid increase of deposits forces them to make investment decisions they otherwise wouldn’t have. That increases the likelihood of a less-than-ideal decision being made, which is what played out.
Still fearful of a bank run and unsure how to make this assessment? Brex, who I mentioned earlier, has a new banking product that is immune from bank runs. Yes, you heard that right. They don’t loan out the money, so 100% of what you deposited is always available.
What a big-time win!
I imagine we’ll be seeing more products like this coming out soon.
Lesson 3: Watch the news to stay up to date
I hate keeping up with the news. For years I prided myself on always knowing what was going on, but then one day I paused. I asked: what is this adding to my life?
When I determined “not much,” I made the decision to stop keeping up with as much day-to-day news. Somehow, you still hear about almost everything you need to anyways.
To keep up with my banking partners, I’ve set up Google alerts so I regular digest of the headlines they end up in.
While most of us aren’t ever going to be in the middle of a bank run, those who move quickly are the ones who are able to get their money out.
Criteria for choosing a bank
Let me guess: your first business bank account is at the same bank as your personal accounts?
It makes sense. You know them and it’s easy. But it’s likely, at some point, you’ll need to make a change.
So, when you do, how do you know what you should you be looking for?
Let’s break it down.
The right industries & regions
Running a business can be hard, so choosing a bank that serves your industry and regional footprint can help provide support you didn’t even know you needed.
If you’re a service business and the bank you’re at mostly caters to manufacturing, they likely won’t understand your needs. It can even make it hard to get the loans and terms you need.
Most banks don’t advertise to specific industries, so you’ll need to ask around. Ask industry friends and other bankers which banks cater to your needs.
Remember: we want more than one banking partner. So, who do you think they’d rather work with? A friend they recommended or someone they don’t know?
The right solutions/services
Understanding banking can be hard, so this will take some work. Treat this process like you’re a beginner because you likely are. Don’t be afraid to ask questions and look stupid. Even embrace it!
The reality is banking solutions and services aren’t natural for most people. By embracing that, you’ll learn a lot more and be able to find the right fit for your company.
When talking to a banker, ask:
- What banking services have companies like yours used?
- What services might you need in the future?
The right processes
Every bank has different approval processes for loans and other services.
Jason Lemkin on Twitter experienced just this.
If you’re in the tech space like Jason, you need a partner that can match your speed! Newer solutions offer faster turnaround.
Before you begin a new partnership, ask about the approval process for each product or service you’ll be using.
- Your banker's transaction limits
- What the approval hierarchy is
- How that changes as deal sizes get bigger
Understanding this helps inform your timeline for making a request. If you know there are 3 or 4 levels of approval for a specific deal you have, you’ll need to bring your bankers in earlier.
By knowing this ahead of time, everything will run more smoothly.
The right access & relationships
Some banks limit your ability to talk to, or build relationships, with others within the bank.
When trying to get a loan, only being able to talk to the banker limits your influence in the decision-making.
You may not be able to talk to the loan committee or certain leadership, but the ability to build more than one advocate inside the bank is essential to creating a long-term partnership.
- Who is on your banker's team?
- What role that teams plays in the process?
- Who does your banker report to?
- How many levels is it “to the top?”
Ideally, you should talk to most of those parties in the interview process.
Need to also ask: do you enjoy talking to your banker? Do they get my goals? They’ll be your advocate inside the bank, so you need to be willing to go to bat for you when the time comes.
If they don’t get your business and goals, they won’t be able to offer counterpoints to any pushback they get.
The right plan for the future
You need the right bank for right now, but you also need the right bank for the future.
Ask your bankers: if we grow 25, 50, or 100%, what other solutions do you have?
Changing banks is hard, so you want to make sure that the bank you choose can grow with you.
But also remember, choosing the wrong partner isn’t the end of the world. You’ll likely have more than one, once you’ve grown, so you can always end the relationship.
Don’t get too attached, because sometimes a bank just isn’t a fit.
Hopefully going through this thought exercise made everything less intimidating.
Something that most never thought about is now having to be thought.
Proceed with caution and make the best judgment you can.
As we saw from the FDIC insuring all deposits, the fear is likely overblown.
But by taking these steps above, you do your best to assure you never have to be in that spot again.
- I’ve partnered with Brex to go deeper on some spend content in the coming months. In meeting the team and looking at their solutions I’ve been really impressed with what I’ve seen. If you’re looking for a new spend platform in your business, I’d encourage you to give them a look.
- One fascinating element of the SVB situation is how quickly it all went down. That is something would only have been possible since social media and online banking, but the regulations are still based in the prior reality. This thread from Professor Stam on Twitter did a great job of breaking this down.
- This was shared the night before it was shut down, showing SVB’s Balance Sheet. It highlights the difference between Available for Sale, Held to Maturity, and Deposits.
What did you think of this week's edition?
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See you next week,