The Collapse of Silicon Valley Bank: What Does It Mean?
The collapse of the Silicon Valley bank last week, with depositors clamoring for their money, sent ripples through the financial system.
Here’s a quick look at the situation:
What was the Silicon Valley Bank?
Silicon Valley Bank was the 16th largest bank in the US. At the time of its collapse, the Santa Clara, California-based bank had total assets of $209 billion, the US Federal Deposit Insurance Corporation said.
Who used the bench?
As the name suggests, the bank was aimed at companies in the technology sector and in the healthcare sector.
How did they get into trouble?
Two factors: a slowdown in venture capital funding in the technology sector and rising interest rates.
Given the limited ability to raise new capital, some of the bank’s clients had to draw on their deposits to meet their obligations. At the same time, the bank used these deposits to invest in bonds.
Amid the current trend of rising interest rates, the bonds that banks had invested in paid less than recently issued bonds. When customers demanded their money, the bank had to sell off its bond investments at a loss.
Eventually the bank became effectively insolvent.
What happened next?
The US government intervened on Friday to seize Silicon Valley Bank’s assets, which were transferred to a new entity. The bank’s collapse was the second largest bank collapse in U.S. history, after the collapse of Washington Mutual in 2008.
Bank failures in the US
U.S. regulators on Sunday decided how fluid the situation had become following the collapse of Signature Bank of New York.
The Canadian government’s Office of the Superintendent of Financial Institutions (OSFI) temporarily took control of Silicon Valley Bank’s Canadian subsidiary over the weekend. While the Canadian arm has no commercial or individual deposit accounts, it has approximately $864 million in business loans on its books.
Karl Schmotta, Corpay’s chief market strategist, said OSFI’s move means they will seek to sell the Canadian unit’s assets and essentially hedge Canada’s banking sector against any further systemic risk that could arise from the collapse.
Meanwhile, the UK Treasury and the Bank of England announced on Monday that they had facilitated the sale of Silicon Valley Bank UK to HSBC, Europe’s largest bank, for a notional amount of one pound. The move ensured the safety of £6.7 billion (Cdn 11.1 billion) of deposits.
What are the consequences for Canada?
While Schmotta said the impact of the seizure won’t be huge in Canada, the bank’s loss from Canada’s venture sector will “significantly reduce inflows into that sector in the months and years to come.”
“Unfortunately, this is a drag on Canada’s longer-term productivity,” he said.
Schmotta also said investors need to brace themselves for a “very turbulent period ahead.”
CLOCK | What does the collapse of the Silicon Valley bank mean for Canada?