As indicated in our original damnation post, Wikipedia states that a a bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. Since some banks, including the Federal Reserve, have a license to literally print money, most people think that bank failure is impossible. But since some banks over-invest in hedge funds, high risk mortgages, or commodity markets, it can happen and it has happened.
Banks have been failing since they first incorporated, and the fiscal crises in the late 2000’s caused the failure of a number of really big banks, including Washington Mutual, Lehman Brothers, and Bear Stearns. And regardless of how many new acts are passed to try and insure banks limit their risk exposure or keep enough cash on hand to cover withdrawals or payouts in the case of a loss, banks will still fail. Regulators will never keep up with the new and inventive ways banks and investors will come up with to invest, and lose, money.
This is a damnation because not only do they hold your money, all of which above the FDIC (or equivalent) insured amount could be completely lost in a bankruptcy, but your supply chain probably depends on letters of credit and inventory based loans, and they can disappear with the bank that disappears with a bankruptcy. This could cause your critical supply lines to stop, which would result in your production lines going down, and revenue losses mounting by the day while you search for new banks, new lines of credit, and new inventory loans.
So what can you do?
1. Diversify your Banking Portfolio
Just like you should diversify your physical supply chain, and have alternate sources of critical raw material and product supply, you should diversify your financial supply chain and have alternate sources of savings and financing.
2. Include your Banks in Your Supplier Risk Management and Monitoring Program
Even if you have multiple banks, and no bank has more than the insured limit of your money, a failure will still cause you significant grief as you would have to file insurance claims to get your money, arrange new payroll solutions, arrange new letters of financing, and so on.
3. Balance bank financing and private lender financing
Sometimes private lenders will give you a better deal on invoice factoring and inventory financing than banks. Be aware of all your options and balance them appropriately.