How family offices can protect themselves from the next banking crisis
Thanks to lessons learned in the 2008-09 banking crisis, most family offices are likely to emerge from the current banking meltdown more or less unscathed.
That’s because the earlier crisis drove home to many family-office professionals the importance of diversifying bank assets – and relationships – across individual banks and even geography. Families who weathered the crisis 15 years ago “already learned their lesson," said Joshua Rubenstein, a partner and national chair of wealth development at Katten.
"Not only are their assets diversified, but their asset managers are diversified, and their credit facilities are diversified," Rubenstein said.
To be sure, family offices are keeping a close eye on the latest developments in the banking world. And not every family went into today’s crisis as diversified as it should be. That’s especially true among family offices formed after 2008.
"We've received inbound inquiries from clients of banks reaching out to us to help handle their current situations," said Matthew Fleissig of the Pathstone multifamily office. For the first time, he said, many families are considering the question, "Should they be having all their assets held there?"
For some family offices, it can be a challenge to diversify — those whose wealth comes from what Rubenstein called "complicated parts of the world" such as Russia, China and parts of the Middle East and who have built a home for some of their assets with U.S. banks. For the latter, finding that initial banking relationship was often a challenge, Rubenstein said. Now, "They couldn't pull the money out if they wanted to [because] it's very hard to find a new bank to take on that at this point."
Besides a lack of diversification, some family offices face other risks and are more vulnerable to the current banking turmoil. These include offices whose wealth and income are primarily linked to operating businesses and those with significant real estate investments.
As Crain Currency reported last week, families with significant real estate investments can face hurdles when closing deals, with uncertainty about a given bank’s ability to actually provide the loans that were promised when a deal went into contract. Private lenders are stepping in with a range of products to fill that gap, but they aren't free.
Then there are families whose cash needs differ from the rest — families operating businesses. By definition, they often "don't have diversified assets," Rubenstein said, and would have a harder time maintaining multiple banking relationships and using other tools typical of family offices because "they keep a ton in cash." Families who sold their business or grew their wealth from other sources, he said, "don't usually keep cash at all."
Overall, family offices should still look to regional banks, though the current crisis has sent those banks’ stocks plummeting.
Fleissig said such banks have occasionally played a valuable role for the families he works with, because families with high assets-to-income ratios don't check the usual boxes at large banks.
"We had a $100 million family apply for a $1 million mortgage at a large bank recently" and get rejected because families with "high assets and low income really have issues getting through very standard levels of processing and standard underwriting," he said. Looking at alternatives, Fleissig said, "Regional and local banks have more customized lending experiences" and are "very, very helpful to the family-office space."