Canada faces muted impact from Silicon Valley Bank failure - The Globe and Mail

People look at signs posted outside of an entrance to Silicon Valley Bank in Santa Clara, Calif., March 10, 2023.Jeff Chiu/The Associated Press

The abrupt failure on Friday of Silicon Valley Bank, one of the world’s most prominent technology financiers, is expected to have a limited immediate impact on the Canadian technology sector, although the repercussions will have a negative impact over the longer term, industry experts say.

On Friday, SVB became one of the largest U.S. banks to fail since the 2008 financial crisis as a California regulator closed it down after it faced a run on its deposits from companies seeking to withdraw cash from their accounts. The crisis was sparked Wednesday, when the technology lender revealed that it hastily sought to raise capital, and the disclosure sent its share price plunging the following day.

The bank revealed it planned to sell US$2.25-billion in shares and had posted a US$1.8-billion loss on the sale on nearly all of its securities that were immediately available to sell, sending its share price tumbling 60 per cent Thursday and a further 66 per cent in premarket trading on Friday before trading was halted.

Later Friday morning, the California Department of Financial Protection and Innovation said it had appointed the Federal Deposit Insurance Corporation as receiver. The main office and all branches of SVB will reopen on Monday and all insured depositors will have access to their insured deposits no later than Monday morning, according to a statement from the FDIC.

The brutal blow has raised concerns about whether SVB’s problems could be a red flag of hidden risks in the banking sector as the cost of borrowing skyrockets. U.S. and European bank stocks plunged on the news, although some started to recover Friday.

SVB first stepped into Canada in 2019, when the country’s banking regulator granted it a licence to lend to companies. Since then, SVB has faced heated competition as Canada’s biggest banks hired large teams of technology bankers and built their own startup lending books to win more business in a sector that once boasted skyrocketing valuations.

But after four years, SVB’s performance in Canada has fallen short of that of its competitors. The Canadian subsidiary had US$692-million in total assets and US$349-million in outstanding loans as of December, according to filings with the Office of the Superintendent of Financial Institutions.

By comparison, Canadian Imperial Bank of Commerce, which has been building its startup lending business, had $2.9-billion in loans with its innovation banking arm as of Oct. 31, 2021.

Canada’s banks are unlikely to face the same cash crunch as SVB amid concerns about the technology sector. The lenders are well diversified across several businesses and sectors, and do not have the same intense exposure to the struggling tech industry as the California bank. The CIBC’s innovation banking division represents about 0.5 per cent of total loans and deposits, according to CIBC analyst Paul Holden.

Overall, the Big Six banks have seen deposits rise in Canada as people stash cash away, while the United States has seen less money flow into deposit accounts. OSFI also requires big banks to hold extra capital as a cushion against economic downturns.

“Liquidity positions across the Canadian banks are strong,” Mr. Holden said in a note to clients. “We do not think that deposit trends will force the liquidation of bond holdings, similar to SVB.”

The impact is expected to be similarly muted in the technology sector, at least in the short term.

Three Canadian venture capital firms contacted by The Globe and Mail said their portfolio companies had little exposure to SVB. “We went through our portfolio, there’s a tiny bit of exposure, none of it is on the deposit side, so I don’t see it having an immediate impact” on invested companies, said Michelle McBane, managing director with StandUp Ventures in Toronto.

Stephany Lapierre, chief executive officer of one of StandUp’s companies, Toronto supply chain software company Tealbook Inc., has been funded by SVB in the past. But in an e-mail, Ms. Lapierre said her firm had switched venture lenders when it raised its last financing in late 2021, choosing CIBC. She added that Tealbook still had a small amount left with SVB recently, but “we transferred it already.”

“We are thankful that it is not impacting us, but definitely feel for all the tech companies that will be affected or potentially not have access to capital in this already challenging market.”

Ms. McBane said she had already received “unsolicited random reach-outs” from banks that StandUp doesn’t deal with now. “I think everyone is going to step in to fill this hole” if SVB retreats. “And in the U.S., I suspect the same thing will happen.”

Sid Paquette head of RBCx, Royal Bank of Canada’s technology and innovation banking practice, said the crisis with SVB is not good for the technology ecosystem as a whole, in Canada and worldwide.

“It’s one less financing source for technology companies, with amazing capabilities now that are potentially at risk of being lost,” he said. “And competition is good – it makes everyone better. These guys have been focused in this sector since 1983, and they have been building up a dominant practice since that time. it’s just really unfortunate to see this happen. I don’t think it’s good for anyone.”

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2023-03-10 18:03:22Z
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