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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 9 minutes read

In the Aftermath of Recent Bank Closures, What Can My Company Do to Mitigate Future Risk?

On the heels of the closures of Silicon Valley Bank on March 10 and Signature Bank on March 12, 2023, many depositors are breathing a sigh of relief. By the end of the fraught weekend, the Federal Deposit Insurance Corporation announced that it would pay all deposits (even those in excess of the $250,000 deposit insurance limit). Prior to that announcement, companies whose cash balances were entirely or principally tied up in investment accounts at these two banks were left wondering what impact the closures of these banks would have on their operations and potential viability, including how they were going to meet near term payment deadlines, especially routine payroll obligations.[1] There are still many issues to work through for creditors and equity holders, but it is not too early to consider the lessons that companies can draw from the weekend’s events and act on to mitigate future risk. We outline below some of the key takeaways.

Do I need an investment policy?

Yes. Every company should adopt an investment policy and actively manage investment risk. An investment policy prescribes how management should invest the company’s cash balances. For operating companies, investment policies accomplish at least two goals. First, the policies set forth the types of securities in which the company can invest and requires management to monitor the maturity profiles of such securities, any liquidity concerns and the performance of the investment portfolio. Second, for operating companies, investment policies are designed to ensure that a company’s cash resources are not deployed in a manner that would inadvertently cause the company to become an investment company under the Investment Company Act of 1940, as amended. This is important because a failure to register as an operating company, even if inadvertent, can have significant negative direct and indirect consequences, including the potential unenforceability of all of the company’s contracts, SEC enforcement action and litigation. An operating company that seeks to raise capital is typically required to obtain a legal opinion to the effect that the company is not required to register as an investment company under the Act. 

In the wake of recent events, we recommend that companies adopt or expand the scope of their investment policies as described below.

What responsibilities should be covered in the investment policy?

Following recent events, we recommend that companies expand the scope of their investment policy to ensure the following items are actively monitored and managed:

  • Liquidity needs. Analyzing the company’s liquidity needs as the business evolves and devising a prudent cash management strategy that is responsive to those evolving needs. In particular, this includes considering whether cash deposits should be swept into liquid, short-term, high quality securities held in properly documented custody accounts on a daily basis or above a certain dollar threshold in order to avoid the limitations of FDIC deposit insurance.
  • Cash flows. Analyzing the company’s cash flows and cash burn to identify which categories of expenses are short-term and recurring (e.g., payroll, insurance, interest, rent) and which are longer-dated or may be amenable to a deferral on payment.
  • Cash balances and portfolio performance. Periodically reviewing the company’s cash balances and the performance of the company’s investment portfolio overall.
  • Risks of financial instruments. Understanding the nature of financial instruments the company is permitted to invest in and any associated risk exposure and verifying that the level and profile of risk is within the company’s risk appetite and is supported by adequate capital and liquidity levels.
  • Risk limits. Establishing relevant risk limits and monitoring compliance with such limits.
  • Concentration. Avoiding any excessive concentration in the company’s investment portfolio (e.g., credit, maturity, counterparty) and monitoring the creditworthiness of the financial institutions that serve as counterparties (for example, by reference to long/short-term credit ratings and credit default swap spreads on its long-term debt).[2] 
  • Letters of credit. Considering whether the cash collateralization of letters of credit exposes the company to unnecessary risk exposure to a particular financial institution and, if so, whether alternative collateral arrangements are necessary. 
  • Alternate capital. Identifying potential alternate sources of capital and, if appropriate, arranging for backup sources of capital.

Who should be responsible for monitoring investment risk and managing compliance with the Investment Policy? Do I need an investment committee?

Not all companies need an investment committee. An investment committee is typically composed of members of management and other key employees and its principal role is to focus on a company’s cash flows, liquidity needs and the investment of any excess funds. Some companies with active balance sheets should have an investment committee, in part because it is a convenient way to ensure regular review of the company’s cash balances and investment portfolio and hold appropriate personnel accountable for its financial management. But for many others, the formation of an investment committee will be unnecessary and burdensome. For these companies, however, it is critical to identify which members of management (e.g., the chief financial officer) and other key employees (e.g., VP of finance, controller or treasurer) have the authority and direct responsibility for developing policies and overseeing those risks and ensuring that regular reports are made to the broader management team and, as described below, the board. 

The investment oversight personnel or the investment committee should, at least quarterly (or more frequently if circumstances warrant, such as during periods of increased volatility), review the items above based on an updated financial analysis of the relevant balances and benchmarks. The investment oversight personnel or the investment committee should also report to the broader management team following each periodic review. 

What kind of oversight should the board have over these issues?

The board is responsible for oversight of the company’s key risks and therefore should regularly review the company’s liquidity profile. We generally recommend that the company’s liquidity be reviewed at the board level at least on a quarterly basis (or more frequently if necessary). In particular, the board should review the risk appetite that guides the strategic direction for the management of financial risk (including asset quality and interest rate risk) and provide credible challenge to, and hold management accountable for, implementing sound principles that facilitate the identification, measurement, monitoring and control of risk. The board should also ensure that the company has sufficient resources to adequately manage this risk, including personnel who have the authority to manage investment risk and the requisite experience (or support from credible external service providers) to do so effectively.

The board may decide to delegate the oversight of these risks to a committee, such as the audit committee or the risk committee, or may instead prefer to review these risks at the full board level. Even if oversight of the company’s liquidity is delegated to a committee, the committee should report to the full board on a regular basis. Thorough record-keeping of board and committee oversight is critical. 

How can the legal team help?

The legal team is instrumental in helping to identify key risks, setting up and amending necessary policies and procedures for managing these risks and responding to any crisis, and ensuring that the relevant stakeholders are adequately coordinated. 

  • Identify the “team”. Overseeing these issues will require a cross disciplinary approach. In addition to the investment oversight personnel or investment committee, key members of finance and legal will play an important role in ensuring that risks are identified and adequately addressed. In the event of a crisis, members from the PR and IR teams will also be critical. Ensure that each of these individuals understands what their key responsibilities are in this regard.
  • Review or adopt an investment policy. If your company already has an investment policy, review the policy to ensure the key tasks identified above are addressed. If your company does not have an investment policy, consider, together with other members of management, whether an investment policy or investment committee is appropriate for the company. In the event your company elects to establish an investment committee, ensure it is tasked with the key elements described above. 
  • Review documentation. Where possible, ensure that all transactions are entered into under industry-standard documentation that includes appropriate termination and netting provisions.[3]
  • Pay close attention to default events and other liquidity-related triggers. Collect all relevant agreements and identify the provisions that may be triggered if there is a liquidity event, paying particular attention to default provisions and provisions that trigger consequences in other agreements (and, in particular, the risk of cross-default to third-party agreements which can have a contagion effect). 
  • Review set off rights. If the company can both owe and be owed money by a particular counterparty or its affiliates at any given time, whenever possible ensure that appropriate set-off rights are in place. 
  • Consider margin requirements. If any derivatives or securities financing transactions require margin posting, review margining provisions in trading documentation to ensure they are favorable to the company.[4]
  • Consider global issues. If any of the company’s assets are custodied abroad (or if a counterparty has the right to custody securities with, or to otherwise transfer securities to, an affiliate outside of the United States), local law advice should be sought as to the risks that such custodied assets may not be returned in the event of the relevant custodian’s bankruptcy and ways to mitigate them. 
  • Ensure this topic is regularly on board agenda. As part of preparing for board or committee meetings, ensure that the topic of investment risk is on the agenda in accordance with the timing considerations described above. To the extent a board committee is tasked with leading the board’s efforts in monitoring investment risk, ensure that the committee’s charter reflects this responsibility. 
  • Review escalation processes. If and when any issues arise, ensure that they are escalated to the broader management team and the board on a timely basis. Also ensure that there is a process for notifying the company’s auditors at the appropriate time.
  • Review insurance policies. Some custodians offer additional insurance protection for some or all of their products. Due diligence should be conducted on the scope and adequacy of such insurance, in particular its availability for claims relating to the financial products utilized by the company. 
  • Prepare communications and disclosures. Given the fallout from recent events, expect to receive ongoing inquiries from investors, customers, vendors and other contractual counterparties as to the company’s exposure to recent bank closures and related risks. Work with PR and IR to prepare accurate statements and ensure that spokespersons for the company use such statements consistently. In addition, public companies should review existing disclosures to determine the need for any changes or updates. In particular, carefully consider risk factors and MD&A to ensure accurate disclosure in light of the company’s specific circumstances in the aftermath of the recent events. It is important to consider both the company’s direct exposure, as well as the potential for indirect exposure through the company’s customers and other contractual counterparties. The SEC can be expected to focus on these disclosures in connection with its review of the company’s periodic filings. 


These recent bank closures illustrate once again that potentially catastrophic events can unravel very rapidly.  Careful planning and preparation can mitigate many of these issues.  We recommend that companies take the time now to ensure that they are adequately protected for any future bank closures.   

At Freshfields, we have been advising public and private companies on the fallout from these bank closures.  As companies continue to grapple with the consequences of these recent events, we are available to guide you through remediation alternatives and mitigation strategies, including all of the issues described above.  In particular, we can assist in preparing or revising investment policies and advising on whether the formation of an investment committee is right for your company. 


[1] We refer you to our blog titled Protecting Assets and Guarding Against Counterparty Risk for more information on what companies can do to increase the likelihood that custodial assets will be returned in the event of a custodial insolvency and further protect against counterparty risk.

[2] Note that, in the context of trading relationships that offer the risk-mitigating benefits of netting across multiple transactions (such as derivatives/ repo transactions), concentration of such transactions with a particular counterparty may be beneficial insofar as it may increase the likelihood of effective netting.

[3] Also, when entering into a financial transaction, consider whether it can be structured as a contract entitled to one of the safe harbors afforded by the Bankruptcy Code (in the case of a counterparty that would be a debtor thereunder) or the Federal Deposit Insurance Act (in the case of a counterparty that is an insured depository institution).  These safe harbors preserve your right to cause the termination, liquidation or acceleration of any such safe harbored contract (and to realize upon related collateral security) when such right arises upon the bankruptcy or receivership of your counterparty, subject (in the case of an FDIC receivership) to the FDIC's right to effect the prompt transfer of such contracts to a solvent financial institution.  The safe harbored contracts are: (a) securities contracts; (b) commodity contracts; (c) forward contracts; (d) repurchase agreements; and (e) swap agreements.

[4] Company-favorable provisions include: (a) two-way posting of collateral, (b) daily valuation of both mark-to-market exposure and posted collateral, (c) no unsecured threshold, (d) small minimum transfer amounts, (e) shortening transfer timing for delivery and return of collateral, (f) providing for effective alternative to transfer of securities by cash payments as an alternative (reduces settlement delays), (g) minimizing any initial margin (so-called “Independent Amounts” in derivatives documentation) or requiring initial margin posted by the company to be held at a third party custodian, and (h) eliminating the counterparty’s ability to invest cash collateral in obligations owing by counterparty or any of its affiliates.