Why Bank Failures Matter to Your Business

Bank failures don’t dominate the financial headlines like they did two years ago, but they still occur frequently enough to send negative ripple effects through the economy.

In mid-March, regulators shut down two banks in Georgia and Illinois, marking the fourteenth and fifteenth failures through the first three months of 2012. As is generally the case, the FDIC has arranged for other banks to assume the failed institutions’ deposits and assets.

Fifteen bank closings in less than three months is still an alarming number – well, so is even just one, if you really think about it – but at least the overall the trend appears to be moving in the right direction. One hundred forty U.S. bank failures were recorded in 2009, followed by 157 in 2010, and 92 last year.

But even if the worst is over, the FDIC projects that the combined bank failures from 2008 through 2015 (forecasted) will cost its Deposit Insurance Fund about $98 billion. That’s a pretty steep price for failure – and guess who ultimately pays?

Bank Failure Defined

A bank fails when it is no longer able to meet its obligations to its creditors or depositors. This can be triggered by the market value of its assets (loans, marketable securities, and other holdings) declining to a level below the level of its liabilities (primarily deposits). Bad loans are often responsible for putting a bank in a vulnerable position.

It’s tough to know which banks might fail. The FDIC does not announce bank takeovers before they happen. Some bank rating services examine overall strength, business models, and risk exposure, but most bank failures are not accurately predicted by outside analysts.

Why it Matters

At an individual level, if your company and personal accounts are held at FDIC insured institutions, you likely have nothing to worry about regarding the safety of your money. Each account is insured up to $250,000. Larger amounts can be spread across multiple accounts and different banks. Contact your financial advisor or accountant if you’re uncertain.

But even if yours is on very solid ground, you still have a rooting interest in all banks remaining healthy and solvent. A 2009 FDIC report showed that even small bank failures can inflict significant damage on a region’s business climate while slowing economic growth. That would be troubling enough by itself, but bank failures bring about numerous other complications for business owners and operators to contend with.

Downward Pressure on Rates. Continued weakness and uncertainty in the banking system contributes to keeping investment rates (CDs, savings, money market rates, etc.) unusually low. Income oriented investors may be forced to take on more risk than they would like. Of course, lower rates can be good if you’re in the market to borrow, but lending is still relatively tight.

Banks Chasing “Lost” Revenue. Continuing bank failures show how competitive and challenging the economics of the banking have become. Investment losses, a sluggish economy, and a barrage of new regulations have all negatively impacted bank profits. Banks trying to meet revenue projections can cut savings rates as mentioned before, or attempt to make up the difference by raising fees on various services. Ultimately, and one way or another, customers will pay.

Morale. The psychological impact of bank failures should not be underestimated. No one likes uncertainty, particularly business people with the ability to make – or not make – decisions regarding investment, expansion, and other activities with potential to grow the economy. Bank failures send a decidedly negative message to decision makers.

Job losses. Jobs will be lost at the failed banks, except for the personnel asked to join the acquiring bank. But no company runs in a vacuum. Beyond the bank itself, additional losses are possible at the companies the bank was supporting as either a lender or as a customer for the other company’s products services. This translates to lower incomes, reduced consumer demand and lower tax revenues for the impacted community.

Reduction in Business Credit. Fewer banks means fewer potential options for business borrowers. Smaller and growing companies tend to get squeezed when credit is tighter. Borrowers may need to consider alternate financing tools. Invoice factoring and receivables financing relationships are fairly easy to establish. Contact MP Star Financial to discuss this option.

Higher Costs for Surviving Banks. The FDIC insurance fund will have to be replenished, likely through higher premiums and extra assessments on its member banks. These costs will be passed through to bank clients via higher fees and payments, or reduced interest payments on account balances.

MP Star Financial’s invoice factoring services can make your company’s cash flow more predictable, allowing you time to connect with customers and grow your company.

Call MP Star Financial for more information at (800) 833-3765, ext. 150.

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