The swift collapse of Silicon Valley Bank (SVB) has sent aftershocks through the global financial system and Canada is not 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 in 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 most Canadians can be confident in the country’s banking system, but fallout from SVB’s collapse could be more substantial in some parts of the economy.
Here’s what to know.
Are Canadian banks vulnerable?
U.S. regulators were forced on Friday to urgently close California-based SVB after billions of dollars were withdrawn by fearful depositors, leading to a run on the bank.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 close New 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 be next if a “contagion” emerges — the term referring to spreading instability through the financial system.
John Ruffolo, a Canadian venture capitalist with 30 years of experience in the technology industry, says the speed at which SVB went from normal operations to completely wrapped up was “shocking.”
“I am absolutely shocked at the swiftness of how the entire fiasco unfolded,” the founder and managing partner of Maverix Private Equity told Global News on Monday.
Ruffolo says the weekend was “quite stressful” for many in tech, including himself, who were unsure how SVB’s operations would be wrapped up. Many customers in the U.S. were unsure if 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 would drive up the risks of contagion.
It was a major relief then, when U.S. Secretary of the Treasury Janet Yellen came out Sunday on CBS’s ‘Face the Nation’ to assure customers that they would be made whole after SVB’s assets were seized, he says.
“I was able to put my defibrillator away,” Ruffolo says, adding he was “very pleased” with the quick 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 statement, OSFI said the lender’s Toronto branch has been primarily lending to corporate clients, and that the branch does not hold any commercial or individual deposits in Canada.
Freeland said in a statement 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 risk of contagion in Canada is limited.
“From a Canadian impact perspective, unlike in the U.S., I would put the level of the impact at very low,” he said.
Money held in Canadians’ bank accounts is largely protected by the Canada Deposit Insurance Corporation (CDIC). The agency insures up to $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, “no one has ever lost a dollar protected by CDIC.”
What about the tech sector?
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 will have to grapple with for months to come.
SVB was a “really important player in the startup ecosystem,” says Ray Newal, CEO of C100, a global community of tech investors and entrepreneurs.
“Regardless of your role in the tech community, it was a tough weekend. It was a very 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.
In addition to 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 need an ecosystem to make that happen. You need a banking infrastructure to make that happen. You need lines of credit and payroll services and a whole stack of different services to enable these startups to become 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 how many 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 could “exacerbate” challenges already facing the sector.
The tech industry has been hit hard as 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 gone through heavy layoffs over the past year.
Bergen says it’s difficult to raise capital for early-stage companies trying to get off the ground right now, and the collapse of SVB — a go-to for many founders looking for a startup-friendly lender to get their start — will only make that harder, he argues.
While tech companies didn’t have bank accounts with SVB in Canada, the lender did provide a valuable loan guarantee to some of its Canadian clients, Bergen notes. This guarantee could give startups anything from a bit of flexibility on their finances to a lifeline when they needed it.
With SVB out of the picture, startups have less of a safety net should they face tough times ahead, he says.
“Firms don’t necessarily need that money immediately, but they often use it as a contingency or as a plan for when they are experiencing economic shocks or potential downturns,” Bergen says.
“So that’s also another piece where it’s not going to be felt immediately. But companies’ ability to be resilient, potentially, it’s taken a bit of a hit.”
Bergen says Finance Canada and Freeland’s office have been engaged with CCI from the beginning to ensure there’s stability in 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.
Market cuts rate hike bets amid uncertainty
The instability borne out of SVB’s collapse could ultimately drag down central banks’ interest rate paths, some market watchers are theorizing.
Wall Street flipped from losses to gains on Monday as expectations built that all the furor will mean the U.S. Federal Reserve won’t reaccelerate its rate hikes, as it had been threatening to do.
Such a move could give the economy and banking system more breathing space, but 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 interest rates soon to stanch the bleeding. The wider expectation, though, is that the Fed will likely pause or at least hold off on accelerating its rate hikes at its next meeting later this month.
That would be a sharp turnaround from expectations just a week ago, when many traders were forecasting the Fed would later this month hike its key overnight interest rate by 0.50 percentage points. That would put a tighter squeeze on markets and the economy after the Fed had just downshifted last month to an increase 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 same magnitude at its next decision on April 12.
Policymakers at Canada’s central bank signalled last week that it would maintain its conditional pause on interest rate hikes, marking a possible peak for its tightening cycle.
With fears the U.S. Fed would continue to push higher, that led some observers to raise alarms about 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 would be pressure on the Bank of Canada to keep 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 idea in a speech on Thursday.
Anil Kashyap, economics professor at the University of Chicago Booth School of Business, told Global News on Monday that while next week’s U.S. Fed decision may seem close, there’s still plenty of time for the fervour around SVB to diminish enough to avoid changing its rate path.
“They’ve got a week before they even have to take the decision. That week’s a long time. If things calm down in the next couple of days, I think we’ll go back to regular programming,” he says.
— with files from Global News’ Anne Gaviola, Aaron D’Andrea, Jackson Proskow, Reuters, and The Associated Press