The swift collapse of Silicon Valley Bank (SVB) has sent aftershocks through the worldwide economic system and Canada isn’t immune from the impacts.
The Toronto-based branch of the startup-focused financial institution was temporarily seized by Canada’s banking regulator on Sunday night as Finance Minister Chrystia Freeland echoed her American counterparts in calling for calm within the face of market uncertainty and fears of contagion spreading to banks north of the border.
Experts who spoke to Global News on Monday said that almost all Canadians could be confident within the country’s banking system, but fallout from SVB’s collapse could possibly be more substantial in some parts of the economy.
Here’s what to know.
U.S. regulators were forced on Friday to urgently close California-based SVB after billions of dollars were withdrawn by fearful depositors, resulting in a run on the bank. Silvergate Capital, which was known for its cryptocurrency-friendly operations, also shut down voluntarily late last week and Sunday saw U.S. regulators move to shut Latest York-based Signature Bank.
Shares of U.S. regional banks slumped on Monday, led by sharp losses in First Republic Bank, spurring fears it could possibly be next if a “contagion” emerges — the term referring to spreading instability through the economic system.
John Ruffolo, a Canadian enterprise capitalist with 30 years of experience within the technology industry, says the speed at which SVB went from normal operations to completely wrapped up was “shocking.”
“I’m absolutely shocked on the swiftness of how your complete fiasco unfolded,” the founder and managing partner of Mavericks Private Equity told Global News on Monday.
Ruffolo says the weekend was “quite stressful” for a lot of in tech, including himself, who were unsure how SVB’s operations can be wrapped up. Many shoppers within the U.S. were unsure in the event that they’d get access to their deposits when banks opened again on Monday.
If SVB’s corporate and individual clients weren’t allowed to access their funds, Ruffolo said that may drive up the risks of contagion.
It was a significant relief then, when U.S. Secretary of the Treasury Janet Yellen got here out Sunday on CBS’s ‘Face the Nation’ to guarantee customers that they might be made whole after SVB’s assets were seized, he says.
“I used to be in a position to put my defibrillator away,” Ruffolo says, adding he was “very happy” with the short response from the Canadian federal government as well.
The Office of the Superintendent of Financial Institutions (OSFI) on Sunday night temporarily seized SVB’s operations in Canada.
In a press release, OSFI said the lender’s Toronto branch has been primarily lending to corporate clients, and that the branch doesn’t hold any business or individual deposits in Canada.
Freeland said in a press release on Sunday night that she had spoken with Canadian financial sector leaders and the Bank of Canada, and that the country’s “well-regulated banking system is sound and resilient.”
Ruffolo agrees that at this juncture, it appears the danger of contagion in Canada is restricted.
“From a Canadian impact perspective, unlike within the U.S., I’d put the extent of the impact at very low,” he said.
Money held in Canadians’ bank accounts is essentially protected by the Canada Deposit Insurance Corporation (CDIC). The agency insures as much as $100,000 of Canadians’ deposits at 86 member institutions in eight categories, for a possible total of $800,000 in coverage.
A CDIC spokesperson told Global News on Monday in an emailed statement that in over 55 years, “nobody has ever lost a dollar protected by CDIC.”
While most Canadians didn’t have much direct exposure to SVB, experts say the collapsed bank’s concentration in startups and the tech industry reveal vulnerabilities the sector can have to grapple with for months to return.
SVB was a “really necessary player within the startup ecosystem,” says Ray Newal, CEO of C100, a worldwide community of tech investors and entrepreneurs.
“No matter your role within the tech community, it was a tricky weekend. It was a really sobering moment for tech,” he tells Global News.
SVB was a “foundational partner” for C100 and would sponsor the group’s events in Canada, Newal says.
Along with bringing together the community at events, he says SVB would play a pivotal role in providing reliable banking, investment and loans to many startups who otherwise would struggle to get access to such services at traditional institutions.
Without early-stage support from a lender like SVB or venture-focused offshoots like RBCx, startups with the potential to bring useful innovation to market might never get out of those early stages, Newal says.
“You wish an ecosystem to make that occur. You wish a banking infrastructure to make that occur. You wish lines of credit and payroll services and an entire stack of various services to enable these startups to turn into viable. And that was the role that SVB really built,” he says.
Ben Bergen, president of the Council of Canadian Innovators (CCI), says the organization put a call out to its members over the weekend to get a gauge of what number of are directly impacted by SVB going under; he pegs that number at under 10 per cent.
But there’s going to be a “hangover” in tech related to SVB’s collapse, Bergen tells Global News, that might “exacerbate” challenges already facing the sector.
The tech industry has been hit hard because the economic outlook turns with fears of a recession hitting Canada and the U.S. in 2023. Many big names in tech, including Amazon, Microsoft and Canada’s Shopify have undergone heavy layoffs over the past 12 months.
Bergen says it’s difficult to boost capital for early-stage corporations attempting to get off the bottom at once, and the collapse of SVB — a go-to for a lot of founders searching for a startup-friendly lender to get their start — will only make that harder, he argues.
While tech corporations didn’t have bank accounts with SVB in Canada, the lender did provide a invaluable loan guarantee to a few of its Canadian clients, Bergen notes. This guarantee could give startups anything from a little bit of flexibility on their funds to a lifeline after they needed it.
With SVB out of the image, startups have less of a security net should they face tough times ahead, he says.
“Firms don’t necessarily need that cash immediately, but they often use it as a contingency or as a plan for after they are experiencing economic shocks or potential downturns,” Bergen says.
“In order that’s also one other piece where it’s not going to be felt immediately. But corporations’ ability to be resilient, potentially, it’s taken a little bit of successful.”
Bergen says Finance Canada and Freeland’s office have been engaged with CCI from the start to make sure there’s stability within the sector.
Global News asked Francois-Philippe Champagne, federal minister of innovation, science and industry, if he has any concerns about knock-on impacts to the tech industry tied to SVB’s collapse, but a spokesperson declined to comment on Monday.
The instability borne out of SVB’s collapse could ultimately drag down central banks’ rate of interest paths, some market watchers are theorizing.
Wall Street flipped from losses to gains on Monday as expectations built that each one the furor will mean the U.S. Federal Reserve won’t reaccelerate its rate hikes, because it had been threatening to do.
Such a move could give the economy and banking system more respiratory space, however it could also give inflation more oxygen. Rate cuts also often act like steroids for the stock market.
Some investors are calling for the Fed to make cuts to rates of interest soon to stanch the bleeding. The broader expectation, though, is that the Fed will likely pause or at the very least hold off on accelerating its rate hikes at its next meeting later this month.
That will be a pointy turnaround from expectations just per week ago, when many traders were forecasting the Fed would later this month hike its key overnight rate of interest by 0.50 percentage points. That will put a tighter squeeze on markets and the economy after the Fed had just downshifted last month to a rise of 0.25 points from earlier hikes of 0.50 and 0.75 points.
A report from Investing.com on Monday also pointed to a turnaround for the Bank of Canada’s rate decisions, shifting from a quarter-point hike in 2023 to a cut of the identical magnitude at its next decision on April 12.
Policymakers at Canada’s central bank signalled last week that it could maintain its conditional pause on rate of interest hikes, marking a possible peak for its tightening cycle.
With fears the U.S. Fed would proceed to push higher, that led some observers to boost alarms concerning the value of the Canadian dollar diminishing, should the Bank of Canada’s key rate ultimately diverge from its counterpart south of the border.
Some economists speculated there can be pressure on the Bank of Canada to maintain pace with the Fed to avoid a weaker loonie fuelling inflation on imports from south of the border, though a senior official with the central bank poured some water on that concept in a speech on Thursday.
Anil Kashyap, economics professor on the University of Chicago Booth School of Business, told Global News on Monday that while next week’s U.S. Fed decision could appear close, there’s still loads of time for the keenness around SVB to diminish enough to avoid changing its rate path.
“They’ve got per week before they even should take the choice. That week’s a protracted time. If things calm down in the following couple of days, I feel we’ll return to regular programming,” he says.
— with files from Global News’ Anne Gaviola, Aaron D’Andrea, Jackson Proskow, Reuters, and The Associated Press