By Marc Markel and Clint Brown
The banking crises created by the collapse of Silicon Valley Bank (SVB), Credit Suisse and further collapses and fears of collapse across the banking industry have created ripple effects of uncertainty across world financial markets. Questions relating to what could happen with my money are not only being asked by individuals, but by businesses as well, including non-profit corporations like property owners associations (POAs). For POAs with possibly hundreds of thousands to millions of dollars in an account to cover their expenses and reserves, what options exist should a bank collapse, and what safeguards can a POA take to ensure the community’s money is protected?
We must stress that bank failures are a very rare occurrence in today’s era. According to the Federal Deposit Insurance Corporation (FDIC), between 2001 and today, 563 banks failed. Of the 563 failures, 465 failures occurred between 2008 and 2012 during the Great Recession and its aftermath. In the rare occurrence this does happen to a bank where a POA holds their accounts, POAs should be exercising caution now.
First, POAs need to review their accounts to ensure they are deposited in financial institutions insured by the FDIC. The FDIC insures accounts up to $250,000 in the event of a failure. For smaller POAs, the FDIC insurance may offer enough protection, but larger POAs may have accounts that go well over the $250,000 insurance limit. One solution to maintain the safety of the POA’s deposits is to have funds divided across multiple FDIC backed banks with accounts that do not exceed $250,000. This may prove to be an accounting nightmare for volunteer boards with routine changes and members and management companies, so be cautious if this is a route your POA chooses to take.
In addition to depositing funds in an FDIC backed bank, POAs can ensure their funds are safe by monitoring the health and volatility of their bank on the market. This is a very difficult task in that the balance sheet of a financial institution is not an easy read and may not be readily available. One way a POA board can do this is by monitoring the value and volatility of the bank’s stock and following news articles about the business of the bank. Significant signs of volatility in the stock or news of potential issues surrounding the bank’s executives, value, or other factors could indicate instability in the bank and a failure could be imminent.
If the POA chooses to divide its accounts, an option exists to be able to use one bank and have funds distributed across multiple banks. A popular option is the Certificate of Deposit Account Registry Service (CDARS). Banks within the CDARS network will offer large deposit CDs to customers. Terms will vary depending on the bank, and the interest rate can be a little lower, but deposits can be managed from one bank and the funds will be distributed into accounts across the CDARS network of banks to not exceed the FDIC $250,000 limit. A concern about using CDARS is the CDs must mature before money can be withdrawn, or a penalty must be paid. So, care should be taken about the length of time to maturity of each CD so that the POA has the funds it will need in the future. POAs choosing this route should examine the different terms the bank offers to decide which best works for them depending upon their maintenance and financial situation.
Along with CDARS, there are other options in the IntraFi network for POAs to consider. POAs should consult with their legal counsel and financial advisors to go through the options and determine what will be the best steps forward for the POA and their funds and what is allowed according to the bylaws. With continued signs of uncertainty in the economy, now is the time to prepare to protect the funds of the POA in case the rare event of a bank failure occurs.
