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What Makes a Bank “Safe?” 

Bank safety is essential for a healthy financial services sector as well as the people and businesses that rely on it. In the wake of 2023’s bank failures, it’s top-of-mind for C-suite leaders across industries. Depositors entrust their hard-earned money to banks with the expectation that it will be secure and readily accessible when needed. But what exactly does it mean for a bank to be “safe?” 

At its core, bank safety refers to the ability of a financial institution to effectively manage and mitigate risks, in order to safeguard depositors’ funds. This involves several key components, including robust regulatory oversight, strong risk management practices, and adequate capitalization. Details about what those components should look like in practice can be a hotly debated topic among legislators and industry experts. But generally speaking, experts and regulators agree that these practices contribute to a safer financial services industry for depositors and financial institutions alike. 

Regulatory Oversight:

Central to ensuring the safety and stability of the banking system is the oversight provided by regulatory agencies. In the United States, the primary regulator for banks is the Federal Reserve, along with other agencies such as the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). These agencies establish and enforce stringent regulations governing capital requirements, liquidity standards, and risk management practices.

Capital Requirements:

One of the most critical safeguards for banks is the maintenance of adequate capital levels. Capital serves as a buffer against potential losses and provides reassurance to depositors that the bank can absorb unexpected shocks. Regulatory authorities determine minimum capital ratios that banks must maintain. By adhering to these capital requirements, banks enhance their resilience and ability to withstand adverse economic conditions. By placing funds with our trusted bank network, Ampersand can help contribute to the institutions’ ability to meet these requirements.

Liquidity Management:

In addition to maintaining adequate capital, banks must also effectively manage their liquidity to meet depositor withdrawals and other funding obligations. Liquidity risk arises when banks face difficulty in accessing sufficient funds to meet their short-term obligations. This, in a nutshell, was a major contributor to the epic downfall of Silicon Valley Bank (SVB) in March of 2023. To mitigate this risk, banks should employ various liquidity management strategies, such as maintaining liquid assets, establishing lines of credit, and diversifying funding sources. By ensuring adequate liquidity, banks are in stronger positions to navigate periods of financial stress.

Risk Management Practices:

Effective risk management is paramount to maintaining bank safety. This entails identifying, assessing, and taking steps to mitigate various risks, including credit risk, market risk, and operational risk. Banks typically rely on sophisticated risk management frameworks and practices to monitor and control risks across their operations. This includes conducting regular “stress tests” to assess the potential impact different scenarios could have on their financial health and resilience. Stress tests simulate adverse economic conditions, such as a severe recession or financial crisis, to evaluate the bank’s ability to withstand such shocks.

Federal Deposit Insurance Corporation (FDIC) Insurance:

While regulatory oversight and risk management practices play a crucial role in ensuring bank safety, deposit insurance provides an additional layer of protection for depositors. Established in 1933 in response to the widespread bank failures during the Great Depression, the FDIC insures deposits at participating banks up to certain limits. Currently, the standard insurance coverage limit is $250,000 per tax ID  per account at an insured bank. However, it’s important to recognize the limitations of FDIC insurance. Coverage limits mean that deposits exceeding $250,000 may not be fully protected in the event of a bank failure. Depositors with large account balances may need to diversify their deposits across multiple insured banks to maximize coverage. Working with treasury management experts like Ampersand can make diversifying those deposits a smooth process. Furthermore, certain types of deposits, such as investments in stocks, bonds, or mutual funds, are not covered by FDIC insurance.

Ensuring Bank Safety Needs a Multi-pronged Approach

It’s clear that ensuring the safety of banks involves a comprehensive approach. Regulatory safeguards, deposit insurance, and proactive deposit management strategies that enable financial institutions to optimize liquidity, manage risk, and enhance depositor returns, are all essential factors. By implementing these strategies, banks can enhance their safety and resilience, fostering confidence and stability in the financial system.

Find out how Ampersand’s deposit management strategies can help depositors and financial institutions. Contact Ampersand to get started.

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