Ten strategies to prepare for local rumors caused recent bank collapses
Ten strategies to prepare for local rumors caused by the Silicon Valley and Signature Bank collapse.
The talking heads, bloggers, pundits and rumor spreaders are at it again. Silicon Valley Bank and Signature Bank fails because of a short-term liquidity crunch and Signature Bank has followed. Despite the removal of the $250,000 FDIC insurance cap,the next thing you know, your bank's customers want to withdraw their deposits immediately, even if the balance is below the FDIC insurance limit. How should you prepare for that to protect your long-term financial health?
- Advance planning is essential. The FDIC almost always shuts down banks on Friday so that they can permit withdrawals the following Monday morning. This may be good for some depositors, but it allows misinformation to circulate and build panic nationwide over the weekend. You never want to unexpectedly find customers at the door on Monday morning waiting to withdraw their deposits. Even worse, you don't want take your crisis management plan off the shelf and shake off the dust because you haven't looked at it for years.
- Review your existing crisis management plan. According to regulatory guidance, you should already have a plan in place. If it needs tweaking, do that immediately. Common problems that we have seen, and common criticisms by examiners, relate to failures to update the plan as officer turnover requires the re-assignment of responsibilities. The plan must conform to your most recent risk assessment and adequately address liquidity risk. Board approval should have occurred within the past year.
If you have any cryptocurrency exposure, because either you have cryptocurrency customers or you have taken cryptocurrency as collateral for a loan, make sure that it is part of your most recent risk assessment. If you have such exposure, verify that it is addressed in other applicable policies, such as your loan policy, your investment policy or your new products policy.
- Designate a crisis manager who is able to get his or her arms around an entire issue and adjust plans and resources as needed to deal with the ever-changing landscape. Consider whether this should not be the CEO because, after all, you still have a bank to run.
- Designate a spokesperson in advance who will put your bank’s best foot forward. This is difficult, because the CEO of the bank may not be the best choice. The CEO may be a brilliant banker and an expert tactician who develops strategies to make your bank the best in your community, and who is wonderful at developing positive relationships with employees. However, he or she may not be the best officer to answer rapid fire questions from members of the media looking for a scoop at any cost.
- Consider retaining a media consultant now who will be available in the future when needed. Your first search for a consultant should not be after you see the line at the door on Monday morning. If you decide to retain a media consultant, the spokesperson should work closely with the consultant.
- Train every employee how to respond to questions from customers, the media and government officials. Anticipate some likely questions that stakeholders may ask; prepare responses to those questions; and have them ready. In most cases, employees should refer inquiries to the spokesperson or the CEO. Employees should not discuss bank business with friends and neighbors because that is how rumors can start. “Did you know that John’s next door neighbor works for Friendly National Bank and he said that the CFO was on the phone with the Fed all day yesterday talking about their borrowing line of credit.” True story – I knew that President Nixon was resigning two days before he announced because my friend, who worked for a Congressman, told me that his friend, who worked at the White House, told him that every low level staffer at the White House was photocopying his or her resume.
- Consider preparing a press release in advance. Talk to your media consultant about whether you should pre-emptively issue a press release that highlights your strength. If you decide not to issue it unless there is a problem, you will still have to revise it at the last minute, but it’s faster and easier to start from an existing draft. Many crisis management experts advise their clients to take responsibility, but make sure that you do not shoot yourself in the foot. Avoid negative statements unless absolutely necessary. A recent press release by a bank regarding cryptocurrency stated that the bank might be unable to meet depositor withdrawal demands if there is another major dip in the value of crypto currency. As the subsidiary of a publicly traded bank holding company, they may have felt an obligation to make the statement, but there are a lot of ways to address the issue. Stabbing yourself in the eye with a sharp stick may not be the best choice!
- Make sure that all liquidity lines of credit are in place, ready to go, and that the collateral for advances is already pledged and delivered. You do not want to try to borrow at the Federal Reserve discount window only to find that you must first pledge $20,000,000 of loans. You should have liquidity lines of credit at more than one lender, because your correspondent bank, where you have a liquidity line of credit, may be facing the same liquidity crunch that you are.
- Visual imaging and presentation is extremely important. We learned this when an employee at the bank facing a run was assigned to keep the floors and counters clean, keep customers in neat lines at teller windows, and hand out coffee and cookies to those waiting. When the cash came from the Federal Reserve, we used it to build a wall of packets of $20 bills behind the teller counter. That finally broke the bank run. A major New York City newspaper had a cover photo the next day of a grinning bank president holding packets of cash with a wall of money behind him.
- If you are the unlucky one who happens to face a panic, debrief everyone afterwards. No one is perfect and your bank may have made mistakes, even if you come through the entire process unscathed. Identify mistakes and revise the crisis management plan if necessary. This will educate your staff and improve your ability to function in the future.
Is crisis management a waste of time? We all hope that you never implement your crisis management plan. However, you are not wasting an opportunity to show your regulators that you are prepared. Years ago, I debated a nuclear recovery plan with bank examiners. Was there a nuclear attack? No, but my client got gold stars from the FDIC a because there was a plan to implement, if ever needed.