US bank run. Know your customer. Businesses should know their bank

According to respected CPA accountant, Coco Hou, the latest US bank run has emphasised the importance of which financial institution businesses put their money in.

Hou is the managing director of Platinum Professional Training, a national training provider for the accounting and bookkeeping industry, and Platinum Accounting Australia, a national network of accounting and bookkeeping businesses that specialise in providing strategic and practical taxation, business and accounting advisory services.

“The latest bank run in the US and the collapse of Silicon Valley Bank, the 16^th largest bank in the US, has highlighted the importance of which financial institution businesses use to house their funds and transact with,” Ms Hou said.

“While many believe the rapid rise in interest rates coupled with viral FUD brought about the downfall of Silicon Valley Bank, many believe it was due to poor treasury management. As a result, the bank has gone under.

“Understandably, the banking contagion is causing fear in the market and raising questions about how safe banks really are. The Australian market is not immune.

“Thanks to the internet, banking contagion can bring down a bank within hours. If banks do not respond quickly and decisively to FUD, they can easily find themselves collapsing under the weight of customers withdrawing their funds.

“As banking customers, businesses are subject to requirements involving know your customer. Businesses must provide financial institutions with significant information in order to set up a bank account. They must provide war and peace and jump through hoops to set up any type of lending facility, and yet banks are not required to reciprocate with the same type of information including how well they will manage our funds when we put money into their account, ie, lend them our money.

“In 2023, businesses should carefully consider which financial institutions they do business with.”

Hou has some key tips for businesses.

Read the news and social media

“Keep up to date with news and social media regarding the banking sector. If you are banking with a financial institution, stay up to date with its activities and news. Negative news moves rapidly and can bring a bank undone very quickly,” Hou said.

“Make sure you have accounts with more than one bank so if you need to move funds quickly to another financial institution, you can do this.”

Bank with several financial institutions

“Diversify your banking by having accounts with several financial institutions. This will ensure you are able to move funds around quickly should you need to do so,” Hou said.

“Ensure that you are easily able to change limits and move funds quickly without difficulty should the need ever arise.”

Customer service and helpline

“When considering a financial institution, do your research. Look at their customer service and helpline supports,” Hou said.

“If a bank has a good reputation for providing excellent customer service and keeping the market updated in a transparent way, this is a good sign.”

Financial health

“We tend not to look at the financial health of financial institutions but the recent bank run in the US has highlighted why this is very important,” Hou said.

“There are some key things to look at when analysing the financial health of a bank. Capitalisation measures how much of a company's assets are owned by the company or its shareholders, as opposed to being owned by creditors. Asset quality assesses the loans in a bank's portfolio. It especially focuses on how many of them are delinquent or risky. If the organisation is heavily weighted to loans in a particular sector or areas of risk, this is concerning. Earnings represent the difference between revenues and expenses. It's the primary measure of a bank's profitability. Liquidity measures how well the bank can meet the expenses required for day-to-day operations, including a surge in cash withdrawals by customers.”

Involve your accountant

“Accountants are experts in understanding financial issues including how to assess the health of a financial institution,” Hou added.

“Work closely with your accountant to decide which financial institution to bank with. Contact your accountant immediately should you become concerned with any aspect of your bank’s activities. Importantly, involve your accountant in your business activities. Accountants are trained to not only help you with your tax obligations, they are also able to assist you with operating your business in the most efficient way.”