Explainer: Silicon Valley Bank collapse and fears something similar could happen in Canada
Posted March 14, 2023 6:36 pm.
Last Updated March 15, 2023 11:32 pm.
Investors and markets in the United States continue to respond to the collapse of the Silicon Valley Bank days after it happened, but the incident has raised questions about Canadian financial institutions.
CityNews spoke with multiple financial experts about the situation involving Silicon Valley Bank to learn more about the differences between the systems in the United States and Canada.
What happened with Silicon Valley Bank?
The collapse of Silicon Valley Bank shook the technology industry and worried small businesses and individuals with deposits at the financial institution. President Joe Biden’s administration moved to guarantee all Silicon Valley Bank’s deposits above the insured limit of $250,000 per account, bringing relief to some.
Silicon Valley quickly established itself as the “go-to” spot for venture capitalists looking for financial partners more open to unconventional business proposals than its bigger, more established peers who still didn’t have a good grasp of technology.
Venture capitalists set up their accounts at Silicon Valley Bank just as the tech industry started its boom and then advised the entrepreneurs that they funded to do the same.
RELATED: Class-action lawsuit filed against Silicon Valley Bank parent
That cozy relationship came to an end when the bank disclosed a $1.8 billion loss on low-yielding bonds that were purchased before interest rates began to spike last year, raising alarms among its financially savvy customer base who used the fruits of technology to spread warnings that turned into a calamitous run on deposits.
“They didn’t have the liquidity, they had to sell securities at a loss, and very quickly they started running out of money,” Laurence Booth, a professor of finance at the University of Toronto, told CityNews.
Without one strong, central regulator for financial institutions, looming concerns about a recession and so many small- and medium-sized banks without the same in-house expertise that’s at the largest banks in the United States, this type of collapse wasn’t totally unforeseen.
“It was a bank that didn’t have enough reserve capital and it didn’t have good financial risk management techniques, and it was called out by large numbers of depositors suddenly wanting to withdraw their funds and they simply didn’t have enough reserves to cope with that.”
Difference between financial systems in the United States and Canada
Booth noted there are major differences between the financial systems in the United States and Canada, making it unlikely such a collapse would occur in Canada.
“We’ve got six big banks in Canada. The United States has got thousands of banks. So trying to predict and prevent the failure of a bank in the United States is a lot more difficult than in Canada,” he said.
Sue Britton, the co-founder of Fathom4sight — a Canadian-based financial market insight company, echoed that sentiment. They both expressed concern potential fears might impact Canadian markets.
“My quick response is no,” she said when asked about the possibility of a bank’s collapse in Canada.
RELATED: Silicon Valley Bank collapse presents low risk for Canadian sector, analysts say
Britton said the concentration of banks reduces risk in certain aspects.
“It’s actually not a competitive market … the risk is actually spread over a very sort of few number of very large banks,” she said.
“Should I be worried about the money in my bank account, and the answer is no.”
Booth and Britton pointed to Canada’s Office of the Superintendent of Financial Institutions as a guardian of the banking sector. It’s the main government office charged with overseeing Canada’s financial institutions. They said the office has provided strong oversight.
The office moved to temporarily seize assets at the Silicon Valley Bank’s lone Canadian branch, which is located in Toronto. It operates as a foreign bank branch and it doesn’t hold any commercial or individual deposits in Canada. It primarily loaned money to corporate clients.
A statement by the Office of the Superintendent of Financial Institutions said superintendent Peter Routledge seized the Canadian assets to preserve the value in light of the decision by the California Department of Financial Protection and Innovation to shut the bank down.
RELATED: Canadian regulator seizes assets of Toronto branch of Silicon Valley Bank
Routledge gave notice of an intention to seek permanent control of the Canadian branch’s assets and is requesting the Attorney General of Canada apply for a winding-up order.
“By taking temporary control of the Canadian branch of Silicon Valley Bank, we are acting to protect the rights and interests of the branch’s creditors,” Routledge said in the statement that announced the temporary seizure.
“I want to be clear: the Silicon Valley Bank branch in Canada does not take deposits from Canadians, and this situation is the result of circumstances particular to Silicon Valley Bank in the United States.”
Meanwhile, despite the lower number of banks and government oversight in Canada, Britton argued an expansion is needed.
“We need more of them and you know, the smaller ones need to get bigger,” she said.
“Small businesses … in Canada are very well-known to be underfunded and the requirements that you have to meet as a small business to get any kind of capital loan anything in Canada, especially from a regulated financial institution, are quite high. In fact, they’re prohibitive.”
With files from The Canadian Press and The Association Press
