Common Cash Management Practices and Associated Protections and Risks

In the wake of the Silicon Valley Bank and Signature Bank defaults, it is important for bank customers to understand the common cash management options and accounts available in financial institutions as well as their associated protections and risks.

The ripple effects from the sudden insolvency of more than one federally insured bank are still being felt throughout the financial services sector and other parts of the US and global economies. US governmental authorities, including the US Department of the Treasury, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC), took actions to provide both insured and uninsured depositors of Silicon Valley Bank (SVB) and Signature Bank timely access to their deposits beginning Monday, March 13, 2023.

The uncertainty, however, over the weekend of March 11 and 12 (and in some cases subsequent to that weekend) regarding the availability of deposits resulted in many banking and financial services customers reevaluating their cash managements practices. Part of this reevaluation involves considering different means of limiting and diversifying risk exposure while also ensuring ready access to cash in the event of another financial institution’s default.

As discussed in our March 14 LawFlash, banks and other insured depository institutions (banks), as well as other financial institutions, offer various types of cash management options. Understanding the different types of programs and the institutions who offer or participate in them is critical to being able to manage risk. For instance, it is important to distinguish between a deposit account at a bank or other insured depository institution (as well as between the different capacities in which a customer holds a deposit account) and a brokerage or other non-deposit account at a broker-dealer, an investment adviser, or a money market mutual fund.

As many customers came to realize in the days since the failure of SVB and Signature Bank, although they may have been in a cash management product that was characterized as a “sweep” option, not all sweep products are designed the same, not all sweep products may be offered solely by a “bank,” and not all sweep products provide the same type of protection (or, where protection does apply, it may apply differently at different times, depending on where a customer’s funds are at any given point in time).

It is therefore important to know the types of products that are commonly available, as well as the different protections that are likely available for each product. The chart linked below  provides a short overview of common cash management options and accounts available and highlights the associated protections and risks of each. Customers should review their options carefully when considering the different cash management methods available to them. Morgan Lewis has experience in reviewing all of these options and stands ready to assist.