The failures of Silicon Valley Bank (“SVB”) and Signature Bank have highlighted the risks to companies of maintaining all of their bank accounts with one institution.

Lenders regularly condition their credit facility commitments on borrowers maintaining their primary deposit accounts with them. Secured credit facilities often further hinder companies’ ability to diversify their cash management by requiring that any accounts not maintained with the administrative agent be subject to deposit account control agreements at the time any such accounts are opened. 

This past week, fearing they may not be able to access cash or make payroll, many companies rushed to evaluate their exposure to “at risk” banks. Facing both a lack of diversification in where their bank accounts were maintained, and loan documents restricting their ability to open new accounts or move cash, companies were forced to decide whether to breach their contractual obligations in a “flight to safety” or risk a run on the bank and subsequent collapse. 

As Kenny Rogers sang:

“You got to know when to hold ‘em
Know when to fold ‘em
Know when to walk away
And know when to run.”

On a call last week, the new CEO of SVB Bridge Bank alluded to the choice many companies must have made (i.e., running) when he suggested that SVB is willing to “work with” clients that pulled money out of the bank in violation of their contracts with SVB.

While the full impact of the recent bank failures and turmoil in the broader market is still unfolding, companies should examine any contractual arrangements to which they are party, requiring that all bank accounts be maintained with one institution. Companies should also look out for liquidity covenants that are calculated based only on cash on deposit at a specific institution. Further, in the context of a new financing or refinancing, companies should push back hard on any condition that their treasury management systems reside with one institution in light of the FDIC’s insurance on accounts.

However, beyond diversifying their cash management banks, companies should conduct due diligence on their existing cash management banks and any potential cash management banks to determine:

  • the percentage of accounts held by the bank that exceed the $250,000 FDIC limit (the higher the percentage, the higher the likelihood and impact of a bank run);
  • the percentage of securities portfolio classified as held to maturity with a long term duration (the higher the percentage, the higher the likelihood of liquidity constraints that impair a bank’s ability to withstand a bank run); and
  • whether the bank has a reciprocal deposit program to maximize FDIC insurance (which splits up large deposits above the FDIC insurance limit and distributes them into a network of other banks).