b'THE OFFICIAL NFBA MAGAZINEA Closer Look: The US EconomyLessons Learned From Marchs Bank FailuresGRACE SCHATZWhat you need to know: The recent failures do not indicate systemic issues, but business leaders should exercise vigilancePoor planning and exposure to assets that became high risk during this business cycle have driven two bank failures (as of this writing) in March. ECONOMIC UPDATESuch failures are alarming, but they are not necessarily an indication of systemic issues that will spill over to other segments of the economy. According to the FDIC, there have been 565 bank failures in the US since October 2000. Most of those occurred during the Great Recession. Annual average US Domestic Financial Industries Corporate Profits peaked in mid-2006 and did not return to those peak levels until mid-2012. More than 78% of the bank failures in the 22+ years of recorded data for such took place during this six-year period. With history showing such a strong association between bank failures and the Great Recession, it is no wonder that people are afraid. However, when we dig a little deeper, we see that bank failures happen with some regularity, at low volumes, during periods of economic growth. For example, there were 22 bank failures in the five-year period from 2001 through 2005. That was a time of nearly uninterrupted economic rise, with growth of 13.4%. It is important to remember that banks, much like other businesses, are susceptible to the consequences of poor decision-making and bad management; such consequences can include failure in any economic environment.So, what can you do to keep your business in a strong position? 1. Assess the health of the institutions you bank with and minimize your exposure to risk. We often recommend that our clients assess thefinancial position of their vendors to avoid calamity; this should also apply to your banking relationships. Diversification is key, as it minimizesrisk. Keep in mind that the issues that caused these bank failures are not likely systemic, given consumers strong financial position relative to theGreat Recession scenario mentioned above.2. Determine your business sensitivity to interest rate changes. By many measures, interest rates are trending at their highest levels in overa decade. Changes in interest rates rarely have an immediate effect on end-use markets or businesses. If your business has been negativelyimpacted by interest rate rise in the past, the risk stemming from this current rise is likely still in the future. Our analysis suggests that theprimary impact will occur in 2024 for businesses that typically move in time with the overall economy. The sooner you can determine this, thebetter. You may have the opportunity to shift your focus to end-use markets that will present less risk next year, or to implement plans to right-size your company and maintain profitability during the upcoming period of economic decline.3. Lead with optimism despite the negativity in the news. Many businesses are growing alongside the overall economy as we move further into2023. This months headlines around the bank failures are just one example of the type of news that can foster fear among your employees,causing them to make assumptions about the position of your business. To the extent that you are able, communicate the reality of the businessconditions you are experiencing and let your workforce know what they can do in their individual roles to help mitigate risk.ITReconomics.com 2023 All Rights Reserved40 / FRAME BUILDER - MAR2023'