BANKING RISK: where's the smartest place to keep cash?

With the collapse of Silicon Valley Bank, everyone is concerned about how to protect their cash, and rightfully so! As explained in this recent LinkedIn article , you need to understand the fundamental difference between banks and custodians like Schwab (that's who we use in our business).

This crisis is not over yet.

If you have significant amounts of cash in your business or in your family, it is critical that you're smart about where you keep your cash. And that starts with understanding the choices available to you right now.

Helping you protect your cash is my first priority and that is what this article focuses on. However, after you've secured your cash, you should level up your understanding on the key risks that banks face and how to manage them because the lessons are applicable to any other type of business that has a substantial balance sheet. I wrote this overview that identifies the key-takeaways in sufficient depth to provide you insight -- but still a quick read.

The first step in protecting your cash is to calculate how much cash you need for daily operations, so you can then quantify the "excess" cash that you have, and need, but do not regularly use on a daily or weekly basis.

With respect to your operating cash, which is often inextricably enmeshed with a variety of banking services, operational efficiency almost requires that you keep this cash at a bank. The two go-to banks that I would look to have relationships with are (a) a mid-size bank that is entrepreneurially-minded and has a good track record of supporting business owners that most big banks have lost long ago (they seem to reserve their little remaining entrepreneurial spark, ironically, for the biggest corporations in the world); one that is big enough that they have been able to achieve a diversified client and asset base and (b) one of the half-dozen or so "whales" whose chief benefit is that they are too big to fail.

With respect to your "excess cash" or the cash that you need, but don't use very often (not more than once a month for example), there are two options that I would focus on if it was me. First, you can negotiate with your bank (if they are big enough) to insure the safety of your deposits. Big banks do this all the time -- but it will cost you something. They will not do that for free and you would be smart to get whatever additional deposit insurance you get from the bank in writing. Second, call me and our team will help you open an institutional account at a respected custodian (we usually use Schwab). We could help you implement what Schwab calls a "money-link" which makes it super easy for you to move money between this account and your corporate (or personal) checking account. And we can also get you checks and a debit card for that account as well.

Custodians are structurally safer than any bank, by definition, but in the spirit of being smart about your cash, I would suggest you only use one of the largest and and most profitable custodians. At this point, you should be asking, "Why?" because you have hopefully learned that operating on blind faith is never a good idea, even when the person giving you advice seems to be credible.

Three reasons. First, you would never want to use a custodian that is not profitable because that could incentivize them to cut corners or take risks in effort to finally become profitable and you do not want that kind of risk or actual behavior in a custodian. Second, you want one of the largest because they have sufficient operating income to cover the massive investments needed in areas like digital security and physical security for that matter. Smaller firms will be resource constrained -- again -- that's why you should stick to the biggest most profitable custodians in my personal opinion. Third and lastly, the biggest custodians have built up billions in equity that serves as a financial buffer to protect them and you from the curve balls that life can throw without warning. And again, if you are not immediately fluent in why custodians are structurally safer than banks, read the synopsis I published just a few days ago.

Hope this is helpful in a practical real-world way for you this week. Happy to help you or your organization if you need any assistance!

Stefan Whitwell, CFA, CIPM