Silicon Valley Bank Fails, How Bad Will the Fallout Be?

[throwaway81523]

https://www.nakedcapitalism.com/2023/03/silicon-valley-bank-fails-with-deposits-of-many-venture-backed-companies-frozen-how-bad-will-the-fallout-be.html

[viraptor]

> For operational reasons, they pretty much have to keep the money they will use for payroll at a single bank.

Does anyone know the details behind this one? Why would it be a problem to split payroll between multiple accounts?

[sokoloff → viraptor]

Would you just be splitting the payroll across two banks such that if either bank failed, you’d miss payroll for some employees?

Or doubling payroll reserves such that either bank could fail and you’d still make payroll?

I suspect there’s no real barrier to doing the first, but also not much benefit.

[projektfu → viraptor]

Generally your payroll provider withdraws the whole payroll a day or two before distributing it to your employees and the tax authorities. Mine doesn't support using several accounts but perhaps the larger processors could do a custom process.

[albert_e → viraptor]

Good point.

Should be a tractable problem to solve I think -- and the current SVB crisis may provide just the impetus and justification needed to develop such a solution.

There was a post yesterday saying unpaid wages pierce the corporate veil in California. This should be a big enough risk for any corporate big or small to look to diversify the risk of missing payroll due to a single-point-of-failure like SVB.

[mixdup → viraptor]

>Why would it be a problem to split payroll between multiple accounts?

Not sure why it was posed as being mandatory. The only "problem" is that it's more overhead and something to manage. It's a problem in that it will cost money to either pay a service or more treasury/finance employees to manage it

[molsongolden → viraptor]

It would be unusual to set up payroll and say “pull 50% from this bank account and 50% from this other account”. I don’t know if any payroll processors support that setup. Most of the time you just connect your checking or payroll sweep bank account then set it and forget it.

[ttfkam]

I'm just going to mention: thank god or the FDIC!

In earlier generations, banks just fell over, and your money was gone. Saving money for retirement? Gone. Saving money for college? Gone.

Thank god for bank regulation/reporting and the FDIC. Painless? No. But SO MUCH BETTER than the deregulated wild west of times past by far.

[brnewd → ttfkam]

If most clients are (startup) businesses, a meager 250k FDIC insurance isn't going to do much.

[codexjourneys → brnewd]

Some banks offer sweep accounts that automatically move funds over the 250k limit into accounts at other banks (again, up to the 250k limit) or into money-market funds (which have their own risks).

I believe there is no way to eliminate credit, default, and/or liquidity risk entirely in banking (when cracks in the system appear and start spreading, you may have exposure no matter what you did), but it's possible to mitigate it in ways that don't seem to have happened here.

Here's a decent explainer on sweep programs (it talks about broker-dealers using them, but banks can also offer them): https://www.sec.gov/oiea/investor-alerts-bulletins/ib_banksw...

[LinuxBender → brnewd]

Unless they use sweep accounts, accepting that those accounts can in some cases have different pros and cons per bank such as early withdrawal fees and minimum limits to avoid fees. Sweep accounts can raise the FDIC insured amount per depositor.