As George Bailey explained to the frightened citizens of Bedford Falls trying to withdraw their savings in the film It’s a Wonderful Life, “The money’s not here.  Your money’s in Joe’s house.  And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others.”  He might not have known it, but George was describing modern fractional reserve banking used around the world.  Under this system, a bank keeps only a portion of the funds its customers deposit into accounts on hand as reserves.  The rest of the money is lent out or invested.  For example, if you deposit $10,000 into a savings account, your bank may keep just $1,000, or 10%, on hand and use the other $9,000 to fund mortgage loans or other investments.  While the funds held in reserve will vary significantly by bank, the Federal Reserve eliminated the minimum reserve requirement in March of 2020, meaning that there is currently no minimum percentage of deposits any bank is required to keep on hand by law.

Because a bank never has all its customers’ funds available, too many people attempting to pull their money out of the bank at one time can cause the bank to fail.  A bank run occurs when depositors fear that a bank will fail and rush to cash out before it closes or runs out of money.  Sometimes bank runs happen for good reasons, such as the exposure of unsound lending or investment practices by the bank, and sometimes they happen because depositors get “spooked” by events or economic conditions that may not even have anything to do with the bank or banks involved.  Sometimes, such as during the Great Depression, systemic fears or failures can cause a run on virtually all banks simultaneously.  These situations are very rare in the United States but happen more frequently in other parts of the world.  No matter the cause, once a run on a bank gets started it can be very difficult to stop and the bank’s failure can become a self-fulfilling prophecy.

While few people may have realized it, three of the four largest bank failures in the history of the United States have occurred just in the past couple of months.  This turmoil began with a run on the Silicon Valley Bank in California and quickly spread to other mid-size banks around the country.  Despite their magnitude, these failures have caused significantly less financial stress than has occurred in the past, most recently during the financial crash beginning in late 2008.  One reason for this is likely that, at least for now, the losses have been limited to the banks themselves and their investors; no individual depositors have lost their money.  This is largely because the deposits of every account holder in an FDIC member bank are insured against loss due to bank failure or theft up to $250,000 by the federal government.

This recent news serves as a reminder to condominium and HOA boards that they have a fiduciary duty to reasonably safeguard the assets of their associations.  At minimum, boards should ensure that funds on deposit are fully protected by FDIC insurance.  It is important to note that the $250,000 limit includes all amounts on deposit with a single bank - meaning any amount over $250,000 in the same bank may not be protected, even if it is in multiple accounts.  If your association has accounts totaling more than $250,000, it may be necessary for them to be deposited in multiple banks. 

Additionally, boards should do basic due diligence regarding the health and stability of any institution holding association funds.  While no board member could be expected to research the investment holdings and lending portfolio of national banks, the investments or deposits with banks at a high risk of failure should be avoided.  If rates on return sounds too good to be true, it probably carries with it a substantial risk of loss.  Even if all association funds are ultimately recovered through insurance, an association may lose the ability to access some if not all of its funds for a period of time in the event of a bank closure, and this could lead to significant hardship.  Several U.S. banks, including some with a footprint in Ohio, have seen their stock prices drop precipitously in recent weeks.  There could be many different causes or explanations for this price fluctuation, and federal authorities have stated there is no reason to withdraw deposits from any of these banks, but some experts believe this could signal that investors consider these banks at a higher risk of failure.  Boards should work with their managers and financial professionals to ensure that their assets are protected and will remain accessible in the event of any further turmoil in the financial markets.  It is important to remember that, with reasonable diligence, banks remain the safest place to keep association funds.

If your association has questions regarding the board’s obligation to safeguard community assets, contact our office at 614-228-0207 and speak to one of our attorneys.