Delving into financial disarray and what contributes to the shutdown of community banking institutions
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Accounting ARC
With Donny Shimamoto, Liz Mason, and Byron Patrick
Center for Accounting Transformation
In the labyrinth of financial intricacies, the collapse of a bank sends shockwaves through the economic landscape, leaving stakeholders scrambling for answers. In this episode, “Accounting ARC: Unraveling the Collapse of Silicon Valley Bank” dissects the demise of Silicon Valley Bank to unravel the intricate web of factors that precipitated its downfall.
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Hosted by seasoned financial experts, this Accounting ARC episode, featuring Terry Sherrill, CPA, a managing director with TPS Thayer in Sugar Land, Texas, dives deep into the underlying causes of bank collapses while offering invaluable insights for CPAs, auditors, and financial professionals to fortify against such catastrophes.
Key Takeaways
1. Risk Management Imperatives: Banks must proactively identify, assess, and mitigate risks. By fostering a culture of risk awareness and resilience, financial institutions can fortify their defenses against potential crises.
2. Regulatory Compliance: Adherence to compliance standards emerges as a non-negotiable imperative in safeguarding the stability and integrity of banking institutions, urging financial professionals to stay abreast of evolving regulatory landscapes.
3. Ethical Leadership and Accountability: Beyond mere regulatory compliance, ethical leadership stands as a cornerstone in fostering trust and confidence within the banking ecosystem. There should be a culture of transparency, accountability, and ethical conduct, emphasizing the indispensable role of leadership in upholding the highest standards of integrity.
4. Continuous Learning and Adaptation: In an ever-evolving financial landscape, the pursuit of knowledge and continuous learning is a potent tool for resilience. By embracing innovation, staying attuned to market dynamics, and honing their expertise, financial professionals can navigate through uncertainty with agility and foresight.
About Terry Sherrill, CPA 
A hands-on CPA with extensive experience with internal controls, internal audit, accounting, and operational excellence, Terry Sherrill has consistently earned kudos from her clients and associates for superior client satisfaction. Her earlier career in community banking gives Sherrill’s bank clients deep experience in regulatory compliance, risk mitigation, loan review, and other compulsory reporting. Her commercial and non-profit clients, for whom she performs accounting services, also benefit from her ability to contribute on a controller or CFO level, acting as the financial advisor for closely-held company owners. Sherrill brings extensive experience with a variety of clients from her more than a decade as a partner at a top 100 CPA firm. She is a licensed CPA in the state of Texas.
Transcript
(Transcripts are made available as soon as possible. They are not fully edited for grammar or spelling.)
Liz Mason 01:01
Hello and welcome to our first recording of ARC: accounting reactions. We nope, that’s all right. What is our stand for, again?
Donny Shimamoto 01:10
Accounting analysis REACTION Analysis. We’ve got the comedy in already, great job.
Liz Mason 01:17
Oh, I didn’t do that on purpose. But you’re welcome. That’s me being awkward and making it comedic. So welcome to arc accounting reactions analysis and oh, wait, that’s wrong. Two guys. Come on. Help me out here. I’m gonna let Donnie do this.
Donny Shimamoto 01:36
Analysis reactions and comedy, which we definitely have a lot now at podcast.
Liz Mason 01:43
Oh, I was just doing that for the outtakes. Right. That’s the point. So today we’re talking about SBB, which has been kind of a hot topic for many different perspectives in our industry. And we’ve brought in an amazing special guest, Terry, so would you mind introducing yourself to our listeners?
Terry Sherrill 02:01
Hi, I’m Terry Sherrill, currently a financial accounting director. At TPS they’re in Sugarland, Texas. My background is very, but my love and more I started out was in internal audit with banks, I’ve worked at small community banks, larger commercial banks, and regional international banks. But I also take, I also took that knowledge with respect to internal controls and banking into learning how to offer Internal Audit Services on an outsourced basis with bank. So I’ve worked in public accounting, offering outsourced internal control, consulting services for banks. So I’ve been involved both as an internal auditor and Operations Officer at a community bank level, as well as an internal audit director for large publicly traded banks, as well as small community banks.
Liz Mason 03:03
So the TLDR on Terry is she’s worked at Every Size bank, she’s done internal audit, she’s also worked in big public accounting firms. She’s built Kas practices. So she understands this from both sides, the internal bank side, the external bank, side, as well as the public accounting perspective. So pretty much we can just let her talk the whole time. And we can just ask questions and learn, that makes our job easy. That’s why we get we get really intelligent guests, right, so that we can just be the the comedy part of it, or at least that’s my my role. Right. So, you know, I think it’s a really good to start with what actually happened, right? So we’ve had the first bank failure in years. And it was kind of unexpected and happened over like a five day period. So that story was really interesting and fascinating. So Don, Adriana, take that.
Donny Shimamoto 04:01
Sure. It from the from the things that I listened to, it really sounded it really was the bank run. It’s and we haven’t heard about this in a long time, like you said, since what was it 2008 was the last time we had that banking crisis and everything. Right?
Terry Sherrill 04:16
It was Washington Mutual, actually, in 2008. And that was the largest bank failure in US history. So the one was Silicon Valley Bank is now the second largest. So yeah, it’s been a little quiet since 2008.
Liz Mason 04:34
That’s a good thing. consistency with our banks. Yeah. So I, you know, from my personal experience, it was really interesting because we were getting emails and calls from investors because we work with a lot of tech companies and a lot of tech companies have their money in Silicon Valley Bank, or I shouldn’t say had although they’re still kind of operating under new guys, but that’s a leader conversation. So we got calls from investors You’re saying get all of our investment money out of Silicon Valley Bank, and we’re going, Okay, how? Because while we’ve advised these companies to open multiple bank accounts they didn’t, and setting up a bank account in 24 hours and transferring $3 million. It’s not that easy. And so that was happening across the country, everyone with money there was going after that they had their investor call, they were saying, get your money out. And the VC is really fueled this run on the bank. That was insane.
Donny Shimamoto 05:28
I totally agree. That was that was the whole interesting thing. And I think that’s the interesting thing, when we, when you read through a lot of the how people discuss this, like, it’s not that the bank was actually failing, it failed, because of all of the stuff or all of the depositors that had money that started pulling it out, they probably would have been okay, if nobody had done anything. I don’t know is that
Terry Sherrill 05:52
So yeah, and like, you guys, I had a client too. And they had $7.5 million at Silicon Valley Bank. And we were advising them the same way. Like, you need to make sure that you move your funds and that type of thing. But, you know, with respect to this, you know, venture capital, obviously, probably since 20, well, playground 2018. That was the tech companies were being funded by those for quite some time. And so there was a lot of venture capital that was going into funding those small tech companies, and especially in the Silicon Valley area. And what was the big push was them putting deposits in. So if you look back at the history of them, they had, they were probably at about 56, maybe a billion dollars in deposits in 2018. By 2021, they had $191 billion in deposits. So in that short period of time, that money was deployed in by those tech companies and the deposits were being made there. So it during those times, when you had basically zero interest rates, because there was not many payments or anything being made there. Now, it’s probably a pretty safe situation, for those for those customers to be in and to have their money. And even though obviously, they were over the $250,000, FDIC insurance limit, and so in, you know, they could then invest. So banks have to do something with those deposits, because they’re not really going to make any money there, they keep a certain amount. Obviously, they’re on tap for them, to fund customers that come in paying and receiving those kinds of things. But basically, they’re wanting to make loans and invest that money in ways that they can. And so here they are sitting at, you know, over $220 billion, and the economy starts changing. And there’s inflation, and interest rates start increasing. So now, you’ve got these small tech companies that need access to money, and they’re not a the, they’re not getting it for venture capital anymore. So some of the some of the funding sources start drying up. So they’ve got to figure out a way to fund their operations. So they’re going out and drawing on their money. And so they’re going and getting their deposits, then out of Silicon Valley, and at the same time, the Fed in their in their infinite wisdom. You know, I know they know what they’re doing. But they’re trying to offset the recession by increasing interest rates. And so we’re Silicon Valley had put their money out there and put their money in long term treasury bonds that were a little they were okay from an interest rate standpoint, but they were investing or what their collateral was mortgage back securities. And so those are like 30 year terms, I mean, out there. So it’s long term. And so that’s what they’re, that’s what their securities were in, in their investments rolling in. So when interest rates started going up, the value, obviously, of those bonds started declining. And so they need to sell those off, because they’ve got now the demand on the deposits and things coming in from their customers or tech customers, they got to find a way to fund those. And basically, it’s a liquidity issue because they’ve got their money in these long term treasuries, until they start selling them off. And as the, you know, as we all know, with respect to, you know, social media and access to things that that our customers all have now, people are seeing in the market, that they’re selling off these Treasury securities, and so that again, causes a bit of a panic in the market, because they’re saying why are they selling off these securities? And so that same that really was kind of a trigger then because Things are so quick now, then your depositors started drawing down their funds and pretty much caused that run on the bank. And so in, we can all see because of access and things like that, then in a very short period of time, those funds can be drawn down. And basically, the banks don’t keep that much cash on deposit. So there’s no way for them to fund it. So they faced, they basically became a liquid.
Liz Mason 10:26
Right. So there’s been, you know, a lot of criticism in our industry around, you know, saying Silicon Valley Bank was way over leverage, the auditor should have caught that they should have put a going concern on there, there’s been a bunch of, you know, I would say, reactions to this particular event, criticizing this industry, because, you know, everyone has this picture in their head of somebody with a green visor sitting in the back of the bank, calculating out the ratios they need, and making sure, you know, there’s enough cash or this investment is right, or, you know, they’re offering the best, lowest interest rates to their investors to get more deposits and kind of playing that game out in here. But what would you say is truly, you know, is this an issue with the CPA profession? Was there an auditor miss? Was there a bank issue? Or was it truly, you know, all of these circumstances combining to create the perfect storm?
Terry Sherrill 11:24
Yeah, it’s so funny, because, you know, I’ve lived through a few of these things happened and right. I mean, so you go into the 80s, you know, and what happened with the financial crisis in the 80s, you go into 2008, and then the subprime mortgage lending, and everybody, and then now again, in 2023, and everybody wants to find some body to blame. For Yeah, for how this happened. And so, you know, so I think it’s, it is a perfect storm from us, you know, from a, from a certain standpoint, I mean, obviously, it’s the market and the conditions in the market. It was their decision from a risk perspective as to how they were investing in their portfolio. So it probably, and I mean, they were looked at by regulators, my understanding, too, is that regulators had made recommendations to them, they, that bank typically was slow to respond. So again, like, what’s the impetus then to get them to do what they need to do. But I think probably from a root cause perspective, it probably is a lack of management, understanding. And the wreck, I would say, the regulations are there, there’s, you know, all sorts of models to stress test your bank from an asset liability quality standpoint. And so I think it probably comes down to the root causes just management decisions, with respect to how they were going to run their portfolio, their liquidity, they were not, they had too much of a concentration with respect to the tech industry, and we all are warned about that is to kick not have concentrations in your customer portfolio and things like that. So I think ultimately, it’s probably going to come down to inadequate management, with respect to their strategic objectives, with respect to their with respect to interest rate, risk, liquidity risk, and just managing their assets. So they didn’t have this type of event. I mean, I really think that probably, when I look back at it from a root cause perspective is going to come down to a poor management.
Byron Patrick 13:53
Well, and I think you nailed it, when when you mentioned the concentration of of risk in the tech industry, particularly the venture backed tech industry, because, you know, if you think of that space, I spent some recent years in the venture back startup some time. I did some time. That’s, that’s a really great, I’m gonna use that one for now unless I did some time in the venture back startup world and, you know, part of that that culture, that world is moving quickly, leveraging technology, high collaboration, and you the way this happen really was the function of a small group of venture funds, telling their portfolio companies get your shit out as quick as possible. And it turned into everybody telling everybody within that venture backed space to pull their money out. Ironically speaking, you know, it’s all kind of the same. pool of venture backed funds that they’re all trying to, you know, it’s like 50 dogs and one stake all pull in at the same stake. And, you know, then you have the the tech industry leveraging technology to be able to move the funds very quickly, rather than if it’s, you know, your main street, you know, businesses, they’re gonna go stand in line at the bank in order to make wire transfers and things. So I, I really believe that any bank that has a high concentration of these types of businesses has risk of an accelerated run far beyond anybody else who even may be, you know, very stable and healthy as a bank.
Donny Shimamoto 15:48
That makes a ton of sense. And, you know, that makes me start to wonder. And I’m actually going to look at Liz and Terry, because I also don’t do traditional accounting anymore, but I’m hearing the dollar amounts, and I keep coming back to, okay, FDIC insurance, then hit is 25,000. So why would you ever put more than 25,000 in a single bank investments, but in banks, like, what is this? What would you guys normally is this what you advise the startups are?
Liz Mason 16:19
Absolutely not. So the 250,000 FDIC limit is really important. And it’s an important metric for companies to understand because, you know, there is risk there. But you know, I think going back to what Terry said, what Byron said, like, this bank was very specific in the way that they operated, right. And they were catering very specifically to as an industry, and even more specifically, the majority of the VCs that put their money there were based in California, right. And so you know, it’s location specific, as well. And so there’s a couple of different niche items happening here. So I’m going to go back to like, when we talk to clients, we tell them, you need at least two bank accounts, there’s a risk associated with having only one bank account, if you have more cash than 250,000, we talk about sweeps accounts, we talk about investing in their own treasury bills, you know, to get some interest in some pretty low risk items, right. And we just talk about general cash management and advise our clients not to do that. Now, our clients also are tech companies, with VCs backing them. So if their VC says you will keep the $5 million, I’m investing into your company in SBB, they’re gonna do it. And SVB was offering interest rates to make it lucrative for them. So while I’m saying invest in T bills, the interest rates SVB are offering are almost the same. And they have the pressure of their investor coming down and saying, No, you need to keep your money here, because this is where our relationship is. And this is how we’re going to further that money for our own benefit, right. And those VCs at the same time are getting discounted rate mortgages, discounted rate loans, they’re getting all sorts of, you know, benefits for the relationship. Now, do I think that those benefits for the relationship were to the extreme where took down the bank? Absolutely not? Do I think they were probably not the right thing to do? Absolutely. But then, you know, like thinking about it holistically. So you have all this pressure coming down, you have these companies saying okay, well, this is what I’m going to do. This is what my investor is saying. And I don’t care if you’re my fractional CFO, like, that’s that where the money is coming from is more important than your advice in this moment. And that was what happened to a significant number of our clients. And then on the flip side, when you’re looking at at the bank in total, you know, that concentration was on purpose. This was a bank founded in 1983, specifically to focus on technology development. And that, you know, in the 80s, was not really a big industry, it was a very small, close knit group of people. It was just kind of at the very beginning. And they survived a few different banking crises and a few different crashes of the tech industry in total, without issue until this year, that’s insane that they went through those cycles, and we’re totally fine. So the concentration risk, I don’t think is the risk that took them down because they’ve been operating in that concentration risk for almost 40 years.
Donny Shimamoto 19:21
That makes me think like, it’s the VCs hate to say it, but the VCs end up being the problem there, right? Because they’re the ones forcing the companies to take the risk because everyone points to sVv. And like they were wrong, they’re wrong. It actually sounds like the VCs were wrong in this one.
Byron Patrick 19:39
I absolutely agree. Donnie, I mean, I can tell you very confidently there, there were startups holding pens of 20s and $30 million in savings accounts, based on the direction of you know, The people they trusted, oftentimes the people who gave them that money to spend. And I would also add, though, I think, I also wonder where the financial advisors were for that internally. So obviously, like Liz said, like, her clients, or they were advising certain things, but many of these startups also have, I’m going to do air quotes CFOs. Because I have opinions there, who, you know, I don’t think really have the knowledge or experience to properly advise based on sound business practices, and they weren’t in there, you know, helping to manage that risk.
Terry Sherrill 20:52
I mean, I hear what you’re saying. I mean, I hear you’re saying what your point is, but from the financial institution standpoint, right, that’s government backed. And the people that work there have an obligation, like, from a regulatory standpoint, to be in compliance with regulations. And so even though as you said, like, it was a tech bank, they still are responsible for diverse making sure that the portfolio is diversified and things like that, like they have a regulatory requirement and commitment to keep to maintain diversity in the portfolio. So I mean, I hear what you’re saying, I guess, Liz, and Byron, but I feel like from the other step, and I know there’s pressure from those tech companies, because the VC saying, hey, you need to put your money in this bank, but the bankers have an obligation and the regulators, because they are going to ensure deposits. And in this, you know, if $250,000 or more, when, you know, again, people are going to come in and step in and take care of that when things happen. So, I mean, I hear what you’re saying, but at some point, don’t you think the bank has a responsibility for insurance, some type of diversity meant by from a regulatory standpoint, they’re committed to doing that? So? So to a certain extent, I kind of come back to management for the banks, again, because they were really out of compliance with what their charter say, Who funds them say? Because I mean, there, there are Federal Reserve Bank mean, that who is that’s who authorizes them to exist? So, I mean, I can say, Yeah, VCs have a party in it. But I feel like the gatekeepers are the financial institutions, and this is federally insured funds. So to a certain extent, the management of that organization has a commitment to me from a rules and regulations standpoint.
Donny Shimamoto 22:58
Okay, I kinda, I kind of like this, because, you know, in the beginning, we talked to everyone’s trying to point fingers, like who’s wrong, who’s wrong, but what I’m actually hearing is, there’s a little bit of wrong in all of the different pieces. So the bank had its responsibilities that it didn’t do, the VCs had their, I don’t want to call it responsibility, but their influence their influence on this, which caused certain actions to occur. And then there was the Emmys, Byron’s air quotes CFOs of the, of the tech companies that also didn’t really do their job in really ensuring them looking out what’s best because I’m hearing to like, even listen to her clients, I we were advising them, and they decided not to listen to our advice. And so they’re, she’s getting over it, and her team is getting overwritten by the old founder, whoever that is kind of going back to the VC. So there’s, I’m hearing a lot of just kind of blame or fault all around. And it’s not like it’s one thing, because one thing that’s driving me kind of nuts on this is everyone’s trying to look for that one thing, this is who we blame. But it sounds like and Liz kind of said it early, it’s almost like a perfect storm of a lot of people kind of did the wrong thing.
Liz Mason 24:09
Well, so I’m gonna push back on the management side, like I totally agree with you, Terry, and that they have regulatory and requirements that they have to actually comply with and should be thinking about. And also, their mission and vision was to create a best in class customer service bank for the tech industry. So is there a space at all for a bank to provide that type of industry specific customer service, or are we saying regulatorily and also, you know, in this current economy and the situation in this country, and whatever we want to call it? That’s not a thing that’s ever going to happen? Because on top of this, we have really horrible customer service from most of our banks. And this bank was willing to step out, build relationships, offer credit to startups. otherwise wouldn’t get it, you know, create banking, you know, models for this particular industry that was completely underserved because they were considered too high risk. Right. So they did take a lot of risk to do that. And also, is there a space for that at all?
Terry Sherrill 25:19
Amen. In doing that, are we willing then to pay the consequences? I guess, right, by kind of putting our eggs all in one basket, or when market conditions, our environmental conditions impact a particular industry, that we’re going to their you know, what goes up must come down like that there will they’re good that you are taking that risk? I mean, there are other banks, obviously, that have to cater to their local communities, obviously. I mean, you know, like you said, it was it’s in Silicon Valley. You know, that’s where that’s where tech is. So they obviously were serving their community from that perspective and offering service. So there’s, there’s something to be said that said for that mean, there’s women owned businesses or black owned businesses. So I mean, from a banking standpoint, so. So I mean, I hear what you’re saying, I think there, there’s obviously, banks, and then, and they have the commitment to serve their local communities as well. So I mean, they need to be doing that. I just think if you look at a bank, as a business, or one of your clients, you probably wouldn’t advise them to stay in one particular thing. I mean, I think diversification is something from a product and services standpoint, that you need to consider to weather a whole lot of storms, like it just makes business sense, even if it’s not from a regulatory perspective.
Liz Mason 27:00
Yeah, well, I think it’s really fascinating here, too, because this particular bank harkens back to like the late 1800s and the early 1900s. Right, and that they have really high deposits in very specific concentrations. And, you know, I think a lot of that is because they were willing to take additional risk and kind of bend the rules in a way that clearly ended poorly. And also, you know, I think the intention there was actually pretty good. And that’s the part that’s hard, right?
Byron Patrick 27:32
Yeah. And we know, um, if Silicon Valley had been I, you know, cited for being out of compliance. And I don’t even know what the rules are related to their portfolio diversification, but had regulators had the FDIC told them or was that cited in their audit as something that that was a risk, or they were out of compliance on? I had not heard that previously.
Terry Sherrill 28:00
In my research, I just saw that they, they had examination comments, I didn’t go specifically into what those were, but they were very slow to respond to regulatory issues. And so that’s kind of from the Federal Reserve. And I mean, again, having worked with banks, from a regulatory perspective, you can go year after year, and not do what the regulators say, it doesn’t go for very long, because right, they give you the right to do business. So at some point, you know, it’s going to hit the fan. And they’re going to put you under some type of regulatory order, so that you will behave and you will do what they say that they’re going to do. I don’t know that I would. I don’t know. I mean, every it’s all that oversight, just like Liz was saying, they’ve had regular, they’ve had regulators in there. They’ve had accounting firms give opinions in there. And then in five days, you know, basically this happened.
Byron Patrick 29:08
Well, and that’s, you know, I setting all of that aside, I just, I wonder if every bank out there is at risk, due to just the speed at which depositors can move money today. And if they need to build some new safeguards in place to account for that, you know, I mentioned earlier, like, you know, community banks might actually just have a line out the door where SVB and Brax and, you know, all of these, you know, digital banks, it’s there’s no line, it’s all virtual moving money. And I just think that because the lines are no longer we’re no longer limited to bank tellers throttling the speed at which cash can can leave the bank vault, that any bank out there is currently at risk of having some sort of run if a social call to action is made that catches fire to withdraw your funds?
Terry Sherrill 30:15
Well, and I mean, it’s a good point. And just like you say, with runs on the bank, like, what they call is a contagion happens after these things. And some of those things like, you know, Signature Bank, and some of the ones that kind of wer second that same world, basically, that, that run or what what happened was silicon impacted the ability for those banks to because people start seeing that action and think they need to get their money out, too. I mean, specifically, banks don’t have I mean, they’re doing a disservice to themselves and everybody else, if they keep that much cash on hand, right, like it does, it’s not prudent. And in the past, you couldn’t put it anywhere to earn much of anything anyway. But, but they don’t carry that much cash. I mean, it’s just not there. And so whether or not some type of again, and I hate to impose some other type of regulations again, but should, you know, should everybody feels like if I’ve got that money, $7.5 million? It better be there, and I want it out today. But should there be restrictions to say like, this just isn’t feasibly possible, or the impacts to the market. And what things will happen are too critical that we may need to put some type of provisions in place to reduce the amount that customers could get out in any one period of time to prevent some of that risk or exposure, in hysteria on other financial institutions?
Liz Mason 31:53
Well, it’s really interesting. Do you guys remember when Robin Hood put a halt trade on GameStop, because of the Reddit blow up, and so like, regulators on the stock market can put, you know, stop trading on any particular trading? That’s happening, it could be, you know, a bank or it could be just in general, you cannot trade that day, they can close the exchange. Right. And they do that to avoid mass hysteria. Right. So that’s been, you know, implemented due to technology, right. Like, that’s a thing that happened that people freaked out about, because it limited an open market. So is that something that we could see kind of rollover into the banking side versus just the investment side?
Byron Patrick 32:39
I think it’s a relevant question that I have to assume yes. Like, they’ve got to do something to hit the pause button and allow, you know, maybe the motions to simmer before, you know, these types of things happen, because it just moves too quick.
Liz Mason 33:02
Yeah, it’s fascinating. And I think, you know, what’s really important is how does our profession respond to this, right? Like, we need to move forward. And this is a great reminder that you can’t really trust banks, right, like you can to a certain extent, but at the end of the day, the FDIC insurance exists for a reason, right? Like, there’s a good reason it exists. And a lot of people have gotten very comfortable trusting the institution. And so, you know, at this point in time, how do we advise clients moving forward? What type of professional skepticism should we put on things? And how do we talk about talk about choosing a bank in general? And what should that process look like?
Terry Sherrill 33:46
Well, even from a banking standpoint, banks look, do their due diligence on where they’re gonna put their funds, right. So they have a whole regulation that says that they’ve got to look at intercompany liabilities and the fair financial strength of those organizations that they do business with, and our customers need to be doing the same thing. You know, and, you know, Chase was involved recently in helping with another financial institution and a buyout for them as well. Chase is definitely and I hate to use this phrase, but you know, are they too big to fail? And if your money’s at Chase, are you are you any less risky than your money being at Silicon Valley Bank? So, again, I think, what would you do? You’re gonna look at financial capacity. And so, you know, mostly publicly traded banks, even community banks, you have access to their financial information and their financial statements. That probably as part of just like how customers do due diligence on their vendors. You want to be doing due diligence on your banking institutions or depository instead quotations as well, and look at what there have a practice in place to look at what their financial strengths are and monitor what those institutions performance are, so that you’re looking, at least you’re evaluating the health and strength of those organizations that you’re keeping your most liquid assets at.
Donny Shimamoto 35:20
That makes a lot of sense. The other thing that I got from and I think it was, Liz actually was listened to both of you kind of some of your interchange was this whole understanding of risk and really understanding concentration of risk. And I don’t necessarily want it regulated, per se, but that as a good management practice, which is something that as accountants, and auditors, we can influence and ask questions about, we really need to raise this concentration of risk question up more, and look at it beyond kind of the historical way we’ve looked at it. Because I like Liz’s example of like, this is like a double niche type of bank that’s serving this. And so does, how does that actually change the risk profile, I maybe can’t do my standard analysis, or the fact that there’s customers that have this much more above FDIC, that’s a different type of risks, which I don’t know if they actually test that as part of the when they look at the Quiddity. And things because that’s a different profile of customers.
Terry Sherrill 36:23
Again, kind of going back, sorry, but it kind of has triggered me on that when we talk about responsibility again, but with respect to concentration of risk, and that they needed to be at a I believe there is something to serve in their community and having organizations that understand the industries in which that they work, but they didn’t have to put all of their investments into long term treasury bonds. I mean, so that is a choice that they made, had they done something and short term, you may not have seen what you saw, with respect to that, because it really was the access. So there were decisions there from from from a management standpoint, and when we talk about risk, and in that case, you know, liquidity risk that they could have, they needed to make provisions for a good mix with respect to what their assets were. And so to make the decision to put as much as they did into, you know, a long term obligation may not have been an appropriate decision for their risk profile, and who their customers were, and again, with the economy and the access to cash, you know, the tech customers were coming in getting money out, that’s what they needed to operate. So I think there’s a whole I mean, I guess, Donnie, I’m saying, you know, our customers have risk profiles that they need to look at, as well into, you know, where they’re putting their, probably their liquidity risk, where they’re putting their cash from an organization, their diversity from a product standpoint, and a customer standpoint, the referee, you know, reputational risk and things like that, that come up with respect to clients. And even if it’s not true, what the market saying about them from a reputation standpoint, because that, again, can influence a business, a business’s ability to do to do work and attract customers. So I think those kinds of things that you’re bringing up probably is a key kind of core management, or tone at the top governance, probably, per se, from an internal controls standpoint that our customers should be aware of.
Byron Patrick 38:49
Well, and I think, you know, I’ve spent almost my entire career talking about a tech stack. And what we need to start talking about is a banking stack, where we are evaluating multiple providers, multiple solutions, you know, I know that we’re starting to see, they probably been around but probably under utilize the solutions that help mix up that cash portfolio and spread it across multiple institutions. So I think the conversation that we need to start having is related to that banking stack with our clients
Liz Mason 39:30
Well into, you know, furthermore, on that front, like those tech banks, right, so those are not nets. They don’t necessarily have their own banking charter, right. They’re not regulated banks. They are a technology that sits on top of the banking industry, that then you put your money in electronically and they spread it out. You don’t even know where your money is, per se. They put it into diversified accounts. Generally those particular or tech solutions offer 1,000,002 point 5 million and some of them even up to like 150 million in FDIC insurance by effectively creating API connections to other banks and opening a ton of accounts, and sweeping your cash there every day. And so when you’re looking at your cash balance, you’re looking at 1020 3040 50 accounts, it depends on how much money you have in the bank. And do we trust the technology to do that correctly? Is that something that we should be advising clients? Hey, go look at this like this. It’s pretty cool. It is really cool. It’s really interesting. It’s a fantastic solution, when insurance limits haven’t been increased at the rate of inflation. And so we have these super low insurance limits that were never intended to stay that low as a percentage of what we have. But at the same time, are we going to trust the technology to do it right and hold our money safe?
Donny Shimamoto 40:55
Interesting concept, I think, you know, that, and, and probably the solution, because I kept thinking that too. Okay. I can understand, though, because if I have that much money, and now I guess we’re across this many banks, now I gotta do this many bank or x or whatever it is right to manage all that and move all the money, and that’s okay. So, but if there was a technology solution that really did that, that would be pretty awesome.
Liz Mason 41:18
Yeah, there are, there’s multiple, there’s a bank called Bella, there’s a bank called thread, then there’s a bunch of other options, you know, where people are working on this and other tech enabled banks that have, you know, their back end being a chartered regulated bank, but their front end being a technology solution, right. But when you look at that, is it trustworthy, it makes the accounting way easier, right? Because then you, you have one account that you’re getting connected into your accounting record. So all the transactions are flowing through a nice, beautiful interface, that’s integrating, it looks beautiful, it functions very much how you would expect an online portal of one bank account to look, however your money is not there, your money is spread out, and all of these different accounts and all of these different banks across the country. So Terry, I’d be curious what your opinion is of that. And if you think potentially, regulators will start regulating that level of technology, versus just the banks underneath at all.
Terry Sherrill 42:22
I think that they probably are going to have to start auditing, regulating, examining that level of technology. And, again, not to speak that of, you know, federally insured financial institutions, but they’re probably a little slower from a technology perspective, than, obviously, their customers are, and particularly their technology customers. That, that they, you know, they’re probably they’ve got to get up to speed with respect to those kinds of things. But, um, so I would say, they’re gonna have to get there, they’re gonna have to look at what are the implications from a security perspective, and Donnie, you get it, you know, you’re very familiar with those kinds of things. But they’re gonna have to be aware from a security perspective. I mean, safeguarding privacy issues, those kinds of things that financial institutions are constantly confronted with. And with respect to what you’re saying, with respect to, you know, RFPs, and cedars and those kinds of investment vehicles. I mean, I think it’s a, I think it’s a great vehicle, to be able to put your money out to all these other financial institutions, I think it’s good for the financial institutions, I think it’s good for the consumer, because now they really do have access to funds that are more secure, that are insured that they’ve spread that risk out again. So again, Liz, I think that it helps also address some of the risk issues with respect to where you’re putting your funds, by being able to sort those out. But then the simplicity of it’s all in one account that you’re reconciling at the end of the day. So I mean, I think, again, this, this person gets a, you know, a lot of opportunities to help think about control, the, the storm, the great storm that we had here. And that, while it is not any one, it’s not any one person’s fault, that it’s obviously a lot of things that we had, I mean, it’s the industry, it’s the VCs, it’s banking, in general, it’s customer awareness and support that and it’s technology. And I think as we’re funding, you know, even with AI and things like that, we don’t always do a good job of looking at what are those implications and considerations of of implementing something that is so quick and Efficient and functions for us and makes our life easier.
Liz Mason 45:06
And I think the irony of all of it is, you know, we live in a country where free banking was kind of built in, right so that we could have capitalism. And we could have industry and we could build, right. And so we ended up with 1000s of banks, and a big regulatory body and more regulations being put upon it over and over and over again, and it’s still backed by the government. At the end of the day, all of the SPB deposits were still backed by our government, yet, you know, the complications of our banking industry are so massive and the complications it creates from a business perspective, even to make sure that you’re you’re keeping your funds secure, and you understand where they’re going and how it’s working. You know, it’s overcomplicated in a way that’s really fascinating and also creates the ability for failure and for to concentrated risk. Yet, at the beginning of all of this, the goal was to have more free cash flow and more money going back into local economies, versus being regulated by the government level yet where there were 1000s of banks versus other countries that made the decision to start with government regulation, and government backed banks, who ended up with five or 10 banks total, with way less, you know, complication, and way fewer risks associated with it, as well. So I just think it’s ironic and funny that that’s the state that our country is in, and the state of our banking industry, when the intention was the complete opposite.
Byron Patrick 46:37
To Alexander Hamilton was really seeing the future as to where this could go.
Terry Sherrill 46:44
Right. And I mean, again, and we haven’t really touched on it too much, because there was an attempt to deregulate back in 2018. With that, and that was for the 250 billion or less, which obviously, Silicon Valley Bank fell within that. But But I don’t believe and I think Donnie said that, too. I don’t believe in if you’re, if something happens, we need to regulate it or over regulate it. And so I don’t want that. I hope that the answer to to our conversation today is not we need more regulation, because and especially not from the standpoint because I’m going to hold true to those community bankers down there who do a fantastic job every day serving their communities, and they do not want the regulatory burden of what these super, you know, international banking organizations have, they don’t need it, they don’t want it. They can’t afford it to do their job well. So. So I’m not going to purport more regulation at this point as the answer. But I think awareness, the rules are in place, we have to be thoughtful, and make good decisions. And we also need to be I mean, again, aware of the technology and the speed of which things can happen, which is, you know, a blessing and a curse.
Donny Shimamoto 48:12
I think you summed it up so well. It really is just, it’s we all need to take the time, think through these things, some of what we’ve what we would have called common sense, which you know, is not that common, so maybe better business practices on how we manage this stuff. So with that, like we’re pretty much at a wrap. And so, Terry, from all three of us, really thank you for joining us, you’ve brought like the wealth of information about this industry, which I know you, I’ve known you for a long time now. And I knew you would do that. So thank you for joining us and sharing all of your thoughts there. For all the listeners out there. I hope that you guys enjoyed our first edition. I hope you got some analysis, we definitely had a bunch of reactions. We don’t know what your reactions are. But we’d love to hear from you on that. And of course we have a good time laughing especially in the beginning with Liz trying to say that oh thank you everyone for joining us and hope we’ll see you on the next podcast.
