Bank failures start getting cited as risk factors after SVB collapse

Add bank failures to the list of warnings that companies give to shareholders, alongside geopolitical crises, climate change, economic turmoil and lawsuits.

The collapse of several regional lenders in quick succession since the beginning of last month is spurring some publicly traded companies to add language identifying the banking sector as a potential area with negative consequences to the “risk factors” they include in regulatory filings.

Management is required to list certain situations that could have an adverse effect on business and therefore the performance of a company’s shares. At least nine firms have updated their risk factors – circumstances that could make investing in their shares risky or speculative – to include a reference to Silicon Valley Bank, which fell into Federal Deposit Insurance Corp. receivership last month.

“Recently, concerns have arisen with respect to the financial condition of a number of banking organizations in the United States, in particular those with exposure to certain types of depositors and large portfolios of investment securities,” investment-banking firm Jefferies said in a 10-Q filing Monday. “While we do not have any exposure to SVB or Signature Bank, we do maintain our cash at financial institutions, often in balances that exceed the current FDIC insurance limits.”

New York-based Signature Bank was taken over by state regulators and handed over to the FDIC just two days after SVB’s failure in mid-March. U.S. banking regulators said at the time that all customers – including those with deposits above the $250,000 FDIC insurance limit – would have access to their money.

The language used by Jefferies and other firms, while new, doesn’t imply that a material effect has been felt, nor does it mean there definitely will be a problem for the company in the future. The reference is included to show investors an issue exists that could cause an impact should circumstances worsen.

The banking language is likely to show up in more disclosures “because no one wants to be left out in the rain if there is a downturn,” Charles Whitehead, a Cornell Law School professor specializing in financial regulation, said in an interview. “But, over time, I’d expect this will disappear or get rolled into a more generic risk factor, as opposed to being specifically tied to SVB or Signature.”

Risk factors are updated routinely, with climate change cropping up on lists in recent years. During the pandemic, companies added discussion of the material impact COVID-19 could have on their business, including liquidity, production and competition.

Other companies that referenced Silicon Valley Bank and the banking sector in their risk factors in recent weeks range from payroll processors to data-center operators.

“Corporate lawyers cut and paste – once a risk factor shows up in one company’s filing, if you don’t have it, people might ask why,” said Adam Pritchard, who teaches corporate and securities law at the University of Michigan Law School. “The only cost of doing this is a little bit of updating between 10-Qs, and it might be useful if something bad happens and you get sued.”