It’s Time to Start Watching Our Banks’ Financial Health

December 9, 2020

Mike Batts, CPA

COVID-19 has taken a toll in lots of ways.  In addition to personal tragedies and challenges, innumerable businesses and nonprofit organizations have been adversely affected.  Some (like airlines, cruise companies, entertainment companies, movie theaters, restaurants, and many local retail establishments) have fared much worse than others.

One sector that warrants watching in the months ahead is the banking sector.  Virtually every adversely affected person or company has a bank.  For every person, restaurant, retail store, movie theater, or other company that cannot make its mortgage payments, a lender is adversely affected.   For every person, company, or organization unable to pay its rent, a landlord is adversely affected.  And many landlords have mortgages on their properties.  Some very high-profile companies announced earlier this year difficulties in making rent payments. (Among them are Cheesecake Factory and WeWork.)   An example of media coverage of the issue regarding smaller businesses is a Washington Post article entitled, “The Next Big Problem for the Economy: Businesses Can’t Pay Their Rent.”  The article sub-header states, “Nearly half of commercial retail rents were not paid in April and May.”  That’s an extraordinary statement, to say the least.

While some companies and the stock market in general have fared well thus far, there is clearly a significant portion of the U.S. economy that continues to suffer from the effects of the pandemic.  The question is what impact will such challenges have on banks and other financial institutions in the months ahead?

While we don’t have the answer to that question, we can say that this is a good time for nonprofit leaders to keep an eye on the financial health of their organizations’ banks.  As with the rest of the economy, some banks will undoubtedly fare better than others.

FDIC deposit insurance coverage provides the backing of the U.S. government for insured bank deposit accounts…generally with a limit of $250,000 of coverage per depositor (not per account) per bank.   Nonprofits that maintain cash balances significantly in excess of FDIC insurance coverage limits should evaluate and monitor the financial health and strength of their banks.

One way to evaluate and monitor the financial health of banks is to use information from an independent bank rating organization.  Bauer Financial offers a star-rating system for most (if not all) U.S. commercial banks.  Another source of bank rating information is Weiss Ratings.   These rating organizations offer various paid options for obtaining more detailed assessments of individual banks.  A quick look at some of the bank ratings provided by these rating organizations may be an eye-opener for some nonprofit leaders.  Each organization has its own approach to evaluating banks…and undoubtedly, some banks would disagree with some of the conclusions the rating organizations draw.

Nonprofits with significant cash deposits may wish to employ strategies under the counsel of their financial advisors to protect their cash from loss associated with failure of a particular bank.  Financial advisors can offer brokered certificates of deposit – allowing investors to buy CDs in multiple banks across the U.S. through one point of contact.  Another option is the use of the Certificate of Deposit Account Registry Service (CDARS – usually pronounced “Cedars”) program available through certain banks. The CDARS program allows a depositor to spread its deposits among multiple banks…keeping balances at each bank below FDIC insurance limits…while having just one bank as its point of contact.

Yet another option to accomplish a similar objective is to invest cash funds either directly in short-term U.S. Treasury securities or in a mutual fund that invests solely in short-term U.S. Treasury securities.  The theory behind this approach is that FDIC insurance represents backing by the U.S. government…and investing in U.S. Treasury securities also brings with it the backing of the U.S. government.  By investing in short-term Treasury securities, there is little to no risk of fluctuation in the market value of the securities.  An experienced investment advisor can help nonprofit leaders determine the most appropriate way to accomplish the intended objectives safely.

As nonprofits continue to navigate the murky waters of the current pandemic, it makes sense to keep an eye on the financial health of our banks and the safety of the cash in our banks.

 

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