The collapse last week of Silicon Valley Bank, as depositors clamoured for their money, has sent ripples through the financial system.
Here’s a quick look at the situation:
What was Silicon Valley Bank?
Silicon Valley Bank was the 16th-largest bank in the U.S. At the time of its failure, the bank, which had its base in Santa Clara, Calif., had $209 billion US in total assets, the U.S. Federal Deposit Insurance Corporation said.
Who used the bank?
As one might expect from its name, the bank catered to firms in the technology sector, as well as the health-care sector.
How did they get into trouble?
Two factors: a slowdown in venture capital funding in the tech sector and rising interest rates.
Faced with limited ability to raise new capital, some of the bank’s customers had to tap into their deposits to meet their obligations. At the same time, the bank was using those deposits to invest in bonds.
Amid the current trend of rising interest rates, the bonds the banks had invested in were paying less than bonds issued more recently. As customers made demands for their money, the bank had to unload its bond investments at a loss.
Eventually, the bank became effectively insolvent.
What happened next?
The U.S. government stepped in on Friday to seize Silicon Valley Bank’s assets, which have been transferred to a new entity. The bank’s collapse was the second-biggest bank failure in U.S. history, after the collapse of Washington Mutual in 2008.
Illustrating how fluid the situation had become, U.S. regulators also moved to seize Signature Bank of New York on Sunday after it collapsed.
The Canadian government’s Office of the Superintendent of Financial Institutions (OSFI) took temporary control of Silicon Valley Bank’s Canadian subsidiary over the weekend. While the Canadian arm has no commercial or individual deposit accounts, it does have about $864 million worth of business loans on its books.
Karl Schmotta, chief market strategist for Corpay, said OSFI’s move means they’ll look to sell off the assets of the Canadian unit and essentially “ringfence” the Canadian banking sector against any further systemic risk that could come from the collapse.
Meanwhile, the U.K. Treasury and the Bank of England said Monday that they had facilitated the sale of Silicon Valley Bank UK to HSBC, Europe’s biggest bank, for the nominal sum of one pound. The move ensured the security of 6.7 billion pounds ($11.1 billion Cdn) of deposits.
What are the implications for Canada?
While Schmotta said the impact of the seizure in Canada won’t be huge, the loss of the bank from the Canadian venture sector “will clearly diminish the flow into that sector over the coming months and years.”
“That is unfortunately a drag on Canada’s longer-term productivity,” he said.
Schmotta also said investors need to brace themselves for a “very turbulent period ahead.”
WATCH | What does the Silicon Valley Bank collapse mean for Canada?