Banks have long been considered as a cornerstone of the global financial system. They hold vast amounts of money and are responsible for lending and investing that money to support economic growth. However, recent events such as the closures of Silicon Valley Bank, Silvergate and Signature Bank have raised questions about the vulnerability of banks and their ability to support emerging industries like crypto and digital assets.
“Investors were unnerved by the speed at which startup-focused SVB, the 16th largest lender in the U.S., was toppled by customer withdrawals”
“$22 Trillion in US Banking System Backed by Just $225 Billion at FDIC: Bitcoin Proponent Gabor Gurbacs”
There are several reasons why banks may be vulnerable to failure, including leadership, management, and their preference for supporting certain industries. For example, in the case of Silicon Valley Bank and Signature Bank, their focus on supporting the crypto and tech industries may have played a role in their closure. The volatile nature of these industries may have led to risky investments and poor management decisions, ultimately resulting in their failure.
Another factor that may contribute to the vulnerability of banks is the disparity between the stored value held by banks and the actual amount of money sitting in the banking system. For the United States the FDIC is responsible for insuring deposits in the US banking system, but its reserves may not be sufficient to cover all potential losses in the event of a banking crisis. This can lead to a loss of confidence in the banking system and a potential run on the banks, which can further exacerbate the problem.
Additionally, banks may be vulnerable to external factors such as economic downturns or regulatory changes. For example, during the 2008 financial crisis, many banks were heavily invested in risky subprime mortgages, which ultimately led to their failure. Similarly, regulatory changes such as increased capital requirements can put pressure on banks and make it difficult for them to remain profitable.
To address these vulnerabilities, it is important for banks to have strong leadership and management, to diversify their investments, and to adhere to regulatory requirements. Additionally, it may be necessary to consider new approaches to regulating and insuring the banking system to ensure its stability and prevent potential failures.
In conclusion, the recent closures of Silicon Valley Bank and Signature Bank highlight the vulnerability of banks and the challenges they face in supporting emerging industries like crypto and digital assets. While there are many factors that can contribute to the failure of banks, including leadership, management, and regulatory changes, it is important to take steps to address these vulnerabilities and ensure the stability of the global financial system.
Things you can consider as a business owner or CEO is these challenging times.
- Focus on what you can control. Even if you cannot control the situation, plan for different scenarios and prepare accordingly.
- Manage your cash flow. Analyze your payments and receivables for the next four weeks and prioritize them. Delay what you can, and try to collect payments faster. Consider offering discounts for advanced payment.
- Prioritize your employees. Ensure that you can meet payroll, as not doing so could risk your business.
- Open additional bank accounts. Consider opening two more accounts to redirect cash receipts and protect your funds.
- Keep shareholders informed. Hold an emergency board meeting to inform them of your exposure to the bank crisis and your plans moving forward. Consider raising emergency funding or securing short-term financing.
- Look into short-term loans. Check with other financial institutions that offer short-term financing or venture debt to cover any frozen deposits.
- Consider deferring salaries. Discuss with your leadership team about deferring part or all of their salaries until the crisis is over.
- Identify key personnel. Identify the people who are essential to your business’s survival and prepare for the possibility of making tough decisions.
- Communicate regularly. Hold an “Ask Me Anything” session with your employees and keep them informed about any major developments to avoid rumors.
These tips can help entrepreneurs navigate difficult situations and ensure the survival of their business. By being proactive, managing cash flow, prioritizing employees, and communicating regularly, founders can overcome challenges and emerge stronger.
With special thanks to Maelle Gavet for sharing her thoughts on LinkedIn.