Talking to clients about the banking crisis

When any variety of financial trouble hits, people often turn quickly to their accountant. The recent banking crisis is no exception.

“I sit in on many audit presentations and one of the comments to the client always includes a footnote that they have more than $250,000 in one bank account and that account is only insured up to $250,000,” said Scott Kadrlik, a CPA and managing partner at Meuwissen, Flygare, Kadrlik & Associates, in Eden Prairie, Minnesota. “They usually don’t care about the comment and don’t do anything about the amounts over $250,000. This year, however, they’ve started moving money and making sure they aren’t exposed to any undue risks.”

Some say the crisis is over, though lending will remain weak. Others say that the “economic headwinds” — funding costs for smaller regional banks, for instance, such as rates they must pay to borrow and higher rates they must pay depositors or lose the customers to money markets and other savings vehicles — will only continue in the coming months and years.

Finished or not, the banking crisis has negatively impacted the markets, values of portfolios and businesses in general.

“It is an opportune time to do estate planning, when assets have declined in value,” said Cindy Ostrager, a CPA and partner at Top 100 Firm CohnReznick in New York. “The lower values will utilize less of their lifetime gift and estate exemption and, at the same time, any future appreciation will remain outside of their estates. So, we’re advising clients to re-examine their gifting techniques, trust structures and estate planning amid this banking uncertainty.”

‘Things stabilized’

Much as they do with tax changes, accountants can offer useful perspective about the crisis.

“Everyone is worried about whether all the banks are going to fail,” said Brian Stoner, a CPA in Burbank, California. “I try to talk about what happened in 2008 to 2010: There were some failures, mainly with companies who often skirted the reserve rules and used faulty underwriting to make too many bad loans. Things stabilized. Just make sure you have FDIC coverage on all your cash investments and SIPC coverage on securities.”

Investors have been increasingly worried that banks have been using accounting tricks — such as reclassifying losses to avoid taking steep write-downs that imperil keeping their doors open — that helped produce the collapse of Silicon Valley Bank, Signature Bank and First Republic this spring.

That’s partially produced one bit of fallout from the banking industry to accounting: First Republic Bank and its auditor KPMG were sued in April by shareholders over alleged misstatements ahead of the spring’s regional-banking crisis. First Republic, its executives and its auditor are accused of repeatedly overstating the safety of its business model even as rising interest rates undermined the value of the bank’s loan and securities portfolios. 

“Hopefully [clients] didn’t have adjustable-rate mortgages and other interest-rate-sensitive items,” Stoner said. “Usually any potential bank failures will end up with the assets purchased by other institutions so there are no access problems to their money. Then we wait and see.”

“There will be a time when the FDIC cannot pay all of the depositors their money,” Kadrlik said, “and a real loss will occur.”

Basic advice

A recent survey of accountants from tax automation solutions provider Avalara and accounting information site CPA Trendlines found that seven out of 10 accountants expect “worse” conditions for the U.S. economy in general and more than three out of five forecast tougher conditions for small businesses, in part because of the banking crisis.

“My red clients are blaming Hillary. My blue clients are blaming [Trump],” said Enrolled Agent John Dundon, president of Taxpayer Advocacy Services in Englewood, Colorado. “I tell both groups … that mainstream media needs to sell advertising and that manufacturing a crisis is the most cost-effective way to do that.”

“I offer the same basic advice to my clients in almost all circumstances: Assemble a good team of tax, financial, legal, and other allied professionals who look at your situation holistically in light of your short- and long-term goals,” said Phyllis Jo Kubey, an EA in New York.

“The clients most upset about the recent banking changes are those who left Chase to move to First Republic because of [the latter’s] superior customer experience and now find themselves back at Chase,” Kubey said. “They’re worried that their relationships and customer service will change for the worse.”

An accountant’s role can also mean just being ready as problems spread. “I haven’t had clients ask about this,” said Dan Henn, a CPA in Rockledge, Florida. “My guess is since all these banks are in the West — I’m in the South, and it doesn’t seem to be on the radar.”