Client Alert: Responding to Bank Failures

Aon is monitoring events closely and has consolidated perspectives from across its business to share insights on how Aon can support clients in the event of a bank failure.

Our insights gathered through sophisticated data and analytics will be critical to help leaders make better decisions about investing capital across risk management, growth initiatives and workforce resilience.

Five Executive Learnings

1. Proactively design and stress test relevant insurance programs to make sure they will perform for all contemplated stakeholders as expected in bank failure claim scenarios
2. Workforce resilience is operational resilience, especially in stressed environments
3. Diversification of funding and liquidity sources is paramount as is a suitable asset and liability management (ALM) programme
4. Intellectual property can be valued and can thus unlock new sources of liquidity and funding
5. Being able to quickly activate a broad, comprehensive due diligence undertaking across various risk and human capital domains combined with the potential to structure innovative insurance solutions pertaining to specific deal situations will unlock value opportunities when presented

Initial Considerations for Banks and Corporates Following Recent Events

Navigating Volatility

Excess FDIC (Federal Deposit Insurance Corporation) Protection – Clients impacted by bank insolvencies may find themselves affected by limits on deposit protection offered by the Federal Deposit Insurance Corporation. This was a significant concern for depositors at the recently affected banks and has increased interest in Excess FDIC Insurance among bank clients. Coverage is purchased by banks at the request of their customers, with the policy providing deposit protection above the limits of the FDIC and typically offers payment within five days of a bank failure.

Directors and Officers Liability (D&O) – Following bank failure, there is the potential for shareholder litigation brought against affected banks and its directors and officers (D&Os). Litigation can include securities class actions for alleged misstatements and omissions, as well as derivative suits against bank D&Os for alleged breaches of fiduciary duties arising out of inadequate internal controls and risk management.

Other potential targets for shareholder claims include counterparties (including, but not limited to, private equity, sponsor firms and portfolio companies) and their respective D&Os, to the extent that such companies’ liquidity, funding, valuations, or business operations were impacted by the bank’s collapse. D&Os may also be targets for regulators, which might launch investigations into potential malfeasance. It is also conceivable that regulators may introduce or re-introduce requirements that create even more exposures for banks and their D&Os, such as stress tests or other capital requirements.

Fidelity Bond or Crime Insurance – Although there have not been allegations criminal wrongdoing following the recent bank failures, many banks should have insurance coverage against employee malfeasance. Fidelity Bond or Crime Insurance – if triggered – would become an asset of the estate, supplementing funds available to depositors and creditors.

Bankers Professional Liability – In the event of an insolvency, depositors may find themselves facing difficulties such as paying payroll and third parties and in turn seek redress from the failed bank through the courts. Circumstances would likely trigger a Bankers Professional Liability policy - where it is in place. Such a policy is designed to provide coverage to banks facing customer litigation where they have failed to perform their obligations.

How Aon Can Help: Aon’s Commercial Risk business works with banks of all sizes to ensure they have appropriately designed insurance programs structured to protect relevant stakeholders and to perform as expected in claim scenarios.

Cyber Insurance – Cyber criminals will attempt to capitalize on any banking collapse by launching targeted social engineering attacks. Some of these attacks could claim to offer assistance or information about the collapse and contain malicious links to fraudulent websites that ask for personal information such as passwords, social security numbers, and credit card and bank account details. The context of the insolvency makes such attacks more convincing and harder to detect.

Those who should be concerned include companies with affected accounts, B2B companies whose customers and/or vendors have accounts with the affected bank/s and other financial institutions. Cybercriminals will try to change the account details of any known clients/customers and vendors before the company does, maybe even implementing stronger controls to make it more difficult for legitimate changes. Cyber criminals could also request rush payment or rerouting of recent payments, and firms will need to set clear guidelines and processes for employees to avoid likely attacks.

How Aon Can Help: Aon’s Cyber Solutions offer a range of services that help clients to assess, mitigate, and transfer cyber risks and quickly recover from incidents.

Capital Markets – A bank failure, like any shock to the economy, will put downward pressure on asset values.

How Aon Can Help: In addition to delivering risk management and transfer solutions from the (re)insurance markets, Aon’s Capital Markets team can also bring alternative, institutional capital seeking diversification to bear to maximize asset sale valuations.

Investment Consulting – The events in the US have highlighted the need for prudent and focused risk management by corporations of how cash and working capital assets are managed relative to the short-term liabilities they support within the organization. It is important to evaluate the investment strategy, diversification, and maturity profile of the assets to ensure that they meet the needs of the organization, while maximizing return generation and managing the risks.

How Aon Can Help: Aon’s Wealth business can undertake a holistic review of how cash and working capital assets are managed versus the corporation’s operating and liquidity requirements, leading to better asset-liability risk management and investment strategy.

Access to Capital

Intellectual Property (IP) – The tightening of liquidity and funding can be expected following a bank failure. However, the ability to value and insure IP on a borrower’s balance sheet can enable lending institutions to engage with the high growth community and offer them more creative and effective funding solutions than were previously available. Events in the US have demonstrated the over-reliance of the venture community on a small number of banks; it is only natural that in the coming weeks founders and investors will be considering alternatives. Companies affected by an insolvency will be more active in the market creating opportunity for many entities, ranging from established venture funds through to new forms of capital seeking to lend against IP.

How Aon Can Help: IP is often a company’s most significant asset and an essential component of corporate value. Aon applies a comprehensive approach to IP across a client’s IP portfolio by applying our three pillars of strategy, valuation, and risk.

Credit – These events are another reminder that shocks to the banking system are inevitable during fiscal and monetary cycles. While the triggers, prelude and impacted sectors are difficult to predict, once these shocks occur, the ripple effects may lead to credit deterioration. It appears that this is another call for all banks to maximize their credit risk management tool kit with solutions from the (re)insurance markets.

How Aon Can Help: Aon offers a broad range of credit risk and capital management solutions across single name and portfolio risk leveraging (re)insurance markets that are complimentary to capital market solutions.

Mergers and Acquisitions (M&A) – M&A opportunities may arise following the failure of a bank. For the banks in question, this could entail a sale of the whole business or sale (carve out) of some of the loan book or other assets / business divisions. Enabling parties undertaking bank to bank M&A to work at speed to secure the broadest insights into the target business will be critical to ensuring optimal outcomes.

For clients of the challenged/failed bank impacted by a reduction in liquidity or credit availability, they will likely look to third parties to support M&A investment and financing, or otherwise potentially be targets for acquisition themselves – particularly considering record levels of capital ready to be deployed by private equity. This could lead to a spate of venture capital buyouts or investment, or an increase in private equity financing and recapitalizations, assuming that the wider credit markets are not adversely impacted by the failure of an individual bank.

For those considering buyouts or investments, due diligence will provide visibility into the transaction, including confirming the underlying insurance, cyber and people position of the target. When assessing tech start-ups, analysis should be undertaken to accurately value IP-rich companies to articulate and maximize value on any sale or investment. Transactional insurance products can also offer protection for buyers, including for litigation, tax and other identified risks. These and other balance sheet liabilities can potentially be ringfenced to mitigate risk for buyers/investors.

How Aon Can Help: With complex, time-critical and highly specialised M&A and finance deals, Aon can offer expertise around deal sourcing, transaction processes and investment strategies. Specialist M&A, capital, and credit professionals bring experience in times of financial uncertainty and unlock greater opportunities at all stages of the deal lifecycle.

Workforce Resilience

Human Capital – For those banks directly impacted by a crisis, there are a number of critical considerations. Banks will need to consider how they can retain critical staff as they wind down operations through special retention incentives and post-wind down transition support. They will also need to examine clawback provisions in executive compensation agreements - and clawback pay, where appropriate. For banks whose wholesale funding costs have increased and there is a particular need for the bank/s to conserve cash, they will need to identify critical staff, conduct attrition risk assessments, and construct an optimal total rewards package that conserves cash.

For other banks, insolvencies highlight that human capital failures are often at the heart of risk management issues. Human capital perspectives should be a critical part of the board’s risk committee. Part of this process needs to include a review of executive compensation structures and clawback provisions to ensure they discourage excessive risk-taking. For clients of the failed banks, they need to begin planning for liquidity challenges in the future as venture lending becomes scarce. This includes compensation programs that emphasize long-term incentives, carefully stewarding cash compensation and evaluating the cash implications of cash settled long-term incentive programs.

How Aon Can Help: Aon’s Human Capital Solutions team applies its expertise, and market-leading workforce data, to help clients tackle transformational projects across rewards, talent assessment and performance analytics.

Health Solutions – Many start-up companies serve as vendors to employer group health plans. For these companies, their immediate concern is ensuring that they have access to capital so they can pay bills, meet payroll, and continue to provide financial transaction services for plan members. These transactions include paying claims for medical services on behalf of employer medical plans and flexible spending accounts. Some of these companies have asked employers to place a hold on sending payments until the companies can set up new banking arrangements. These requests for accommodation are likely to increase as the ripple effect from these failures deepen.

How Aon Can Help: Aon’s Health Solutions business works with employers to address the implementation, financing, operation, and administration of group health plans. Aon’s health care consultants help employers establish and maintain relations with vendors across regions and markets.

Conclusion

Recent bank failures have demonstrated the need for clients to (re)examine their risk management and capital strategies to protect and grow their business.

Insights gathered through sophisticated data and analytics will be critical to help leaders make better decisions about investing capital across risk management, growth initiatives and workforce resilience.

Contact your local trusted advisor to access advice and solutions to protect and grow your business.

Key Contact

Joel Sulkes
Global Financial Institutions Practice Leader
[email protected]