Posts Tagged ‘Bank Failure’

Diversify Your Banking Risks

Friday, May 1st, 2009
Watch Where You Put Your Money

Watch Where You Put Your Money

In Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (John Wiley & Sons Inc., second edition, 2008), I advised readers about the disaster category of third party failure. This is the risk of failure of the provider of a product or service upon which your small business depends such as, for example,  your Internet service provider or your telephone service. In the context of the banking crisis, a particularly relevant example was presented in the pages of the Wall Street Journal this week.

The Journal reported the story of a depositor who, eight years ago, put her life savings of nearly $600,000 into accounts at Superior Bank of Hinsdale, Illinois. Approximately one month after this deposit was made, the Federal Deposit Insurance Corporation (“FDIC”) seized Superior as a result of allegations over improper financial and accounting practices in its sub-prime business. The FDIC limits deposit insurance to $100,000, with the result that this depositor lost much of her money, as did hundreds of other customers of Superior Bank.

One way to mitigate the risk of third party failure is to diversify your suppliers. Your small business should have, for example, a primary Internet service provider and a secondary, unrelated, Internet service provider which you can use if the primary provider’s service is disrupted. The same is true of your banking services. This depositor would have benefited by making deposits¬† in separate accounts of no more than $100,000 each in at least six different banks. Then, when Superior was seized by the FDIC, she would have had immediate access to the other $500,000 deposits in the other institutions, while she waited for the FDIC insurance to make restitution for the $100,000 she had deposited with Superior.

Of course, since this event occurred, the FDIC raised its insurance limits to reassure depositors of the safety of our banking system during this difficult time. Even so, as a small business owner, if my liquid cash were, let’s say, $50,000, I would not deposit it all in a single bank, even though the entire deposit would be covered by the FDIC. Why? Because I have a business to run and that depends on immediate availability of funds. I cannot have my small business experience even a short period of illiquidity while waiting for a benefit from the FDIC. So I re-assert the advice I had previously given: think redundancy of suppliers. This depositor learned a lesson the hard way; make sure that your small business does not.