Business Survival Skills: Dealing with the Next Bank Collapse

We grew up hearing older relatives talk about 1930s bank failures during the Great Depression.  Most people believed it would never happen again.  While the Federal Reserve  (The Fed) asserts there are only 300 banks that could be facing difficulties, that information is contested by investment analysis firm, Weiss Research.  Weiss declares 1479 banks and 158 thrifts along with $3.2 trillion of assets are at risk of failing.  Is your bank among them?  In case you think the analysts at Weiss might be mistaken about their in-depth findings, neither Washington Mutual nor Wachovia were on The Fed list of endangered banks.

Here's what the FDIC (Federal Deposit Insurance Corporation) insures:

• $250,000 per individual in multiple accounts (checking, savings, CDs) in one FDIC-insured financial institution
• $250,000 per business in multiple accounts (checking, savings, CDs) in one FDIC-insured financial institution

If you have $250,000, or less, in an FDIC insured bank you do not need to worry about your deposits.  Your money is safe. 

What is causing these bank collapses?  While trillions of dollars in defaulted mortgages reduced income expected by financial institutions and started the mortgage meltdown, we have devolved into a larger credit crunch.  When banks with insufficient assets began failing, depositors -- fearing the safety of their money -- moved it to money market funds or other banks and credit unions.  Money market funds have proved to be the safe alternative for accounts greater than $250,000 because they are now insured for any amount.  Of course, the removal of additional assets from banks causes bank liquidity (cash) to continue to diminish and puts their financial health in jeopardy. 

In addition, banks and major corporations are not able to sell their commercial paper.  Most of us have never needed to concern ourselves with commercial paper.  Now we discover the ramifications of its decline could affect our lives.  Commercial paper is an investment issued by a business (financial institutions and large corporations) and purchased by major investors.  Purchases were considered extremely safe although that safety was based solely on the excellent reputations of companies.  Now that no financial institution or corporation seems rock solid, commercial paper sales have dropped 15 percent, $264.4 billion, over the past four weeks as the credit crisis ravages Wall Street. 

The sale of commercial paper provides the revenue needed by businesses to fund day-to-day operations.  A decline in the sale of paper means companies can't access the funds they need to produce goods, pay employees and conduct business.  The Fed has announced a program to buy commercial paper.  While it will be extraordinary to have the central bank of the U.S. lending money directly to many major corporations, the alternative of additional bail out money is far less appealing.  It is hoped that once The Fed steps in as an investor others will be willing to wade back into the commercial paper market.  The theory: This will cause more cash to circulate through the economic system, making it accessible for smaller companies and individuals.

Again, we stare the consequences of "trickle down" economics in the face.  The truth: No one knows what's going to happen.  We're in uncharted economic waters with complex investment instruments, enormous national debt and staggering societal challenges all affecting our credit markets. 

When you read or hear "experts" tell you to conserve and save and plan for a rainy day while you're trying to figure out where next week's payroll, or tomorrow's delivery truck gas, or next month's mortgage, or third quarter taxes are going to come from . . . all the "plan for tomorrow" rhetoric may be more than you can stomach.     

What can you do to protect your business in the face of unprecedented credit challenges?

• Find a solvent local or regional bank that did not sell risky loans and has maintained a conservative, asset-rich balance sheet.
• Develop a real relationship with your banker.  Communicate enthusiasm for your business and its future.  Get your banker excited about partnering with you to help you grow.
• If your primary business focus includes goods or services, which can be easily cut from budgets, figure out what essential items you can offer during this extended financial downturn.  How can you re-direct your business to retain current customers and add new ones while times are tough?
• When expanding into essentials you may discover investment capital is far easier to attract -- from your friendly banker or other sources.

If you're not a member of your local Chamber of Commerce and professional organizations for your industry, join them.  The camaraderie of others, facing similar business issues, can be informative to the mind and helpful to the spirit during this difficult period.