Canada, other governments hustle to stop potential banking crisis after Silicon Valley Bank collapse

Governments in the US, UK and Canada are taking extraordinary measures to avert a potential banking crisis after the failure of California-based Silicon Valley Bank fueled fears of wider upheaval.

US regulators worked over the weekend to find a buyer for the bank, which has more than $200 billion in assets and caters to tech startups, venture capital firms and well-paid tech workers.

While those efforts were unsuccessful as of Monday morning, officials assured all customers of the bank that they would be able to access their money.

Late Sunday, Treasury Secretary Janet Yellen announced that all depositors will have access to the funds, no matter how much they have in the bank.

“Small businesses across the country that have deposit accounts in these banks can breathe easier knowing they will be able to pay their workers and pay their bills,” US President Joe Biden said at a press conference Monday morning.

“Hard-working employees can also breathe easier,” said Biden, stressing that the bill for such protection will not be borne by taxpayers and will instead come out of the fees paid by banks for deposit insurance, which is managed by the Federal Depository. The Insurance Company, or FDIC, and by law only covers the first $250,000.

WATCH | Market strategists on the impact of SVB’s collapse:

Investors in the bank, however, will likely be wiped out. “They deliberately take risks and when the risks don’t pay off, the investors lose money,” Biden said. “That’s the way capitalism works.”

Management at the bank was fired, Biden said. “If the bank is taken over by the FDIC, the people who run the bank should be out of a job,” he said.

The initial response from investors was mixed, with shares in Canada’s five largest banks down between two and four per cent in early trading, but several US banks suffered heavy losses.

Shares in California-based First Republic Bank, which saw long lines of customers over the weekend, fell 66 percent before trading was halted. Western Alliance Bancorp fell 77%. Comerica fell 40 percent while Charles Schwab fell 15 percent.

Governments beyond the US responded

The guarantee is part of an expansive emergency lending program to prevent a wave of bank runs that would threaten the stability of the banking system and the economy as a whole.

Meanwhile, the British Treasury and the Bank of England announced early Monday that they have facilitated the sale of Silicon Valley Bank UK to HSBC, Europe’s largest bank, guaranteeing the security of 6.7 billion pounds ($11.1 billion Cdn). HSBC paid a nominal sum of one pound to take over the asset.

While the bank is small, with less than 0.2 percent of UK bank deposits according to central bank statistics, it has played a large role in financing technology and biotech startups that the British government counts on fuel economic growth.

Jeremy Hunt, the head of the UK Treasury, has said that some of the country’s leading technology companies could be “discharged.”

“When you have a very young company, a very promising company, they’re also fragile,” Hunt told reporters, explaining why the authorities were so quick. “They have to pay their staff and they are worried that at 8am this morning, they may not be able to access their bank accounts.”

He insisted there was no “systemic risk” in the UK banking system.

Classic ‘bank run’

Regulators in the U.S. quickly shut down Silicon Valley Bank on Friday amid a spate of traditional bank operations, where depositors rushed to withdraw their funds at once. It was the second largest bank failure in US history, behind only the 2008 failure of Washington Mutual.

In Canada, the Office of the Comptroller of Financial Institutions took temporary control of the Canadian subsidiary over the weekend. While the Canadian arm has no commercial or individual deposit accounts, it does have about $864 million in business loans on its books.

“By taking temporary control of the Silicon Valley branch of the Bank of Canada, we are acting to protect the rights and interests of the branch’s creditors,” Superintendent Peter Routledge said in a statement.

In a sign of how fast the financial bleeding is, regulators announced that New York-based Signature Bank also failed and was seized on Sunday.

With more than $110 billion in assets, Signature Bank is the third largest bank failure in US history. Another beleaguered bank, First Republic Bank, announced on Sunday that it has improved its financial health by gaining access to funding from the Federal Reserve and JPMorgan Chase.

extensive government intervention

Silicon Valley Bank began to slide into insolvency when it was forced to dump some Treasuries at a loss to finance customer withdrawals. Under the Fed’s new program, banks can post these securities as collateral and borrow from the emergency facility.

The Treasury has set aside US$25 billion to offset losses incurred in the Fed’s emergency lending facility. Fed officials said, however, that they do not expect to have to use any of that money, given that the securities sent as collateral have a very low risk of default.

Although Sunday’s measures are the most extensive government intervention in the banking system since the 2008 financial crisis, they are relatively limited compared to what was done 15 years ago. The two failed banks themselves have not been bailed out, and taxpayers’ money has not been provided.

US President Joe Biden said on Sunday afternoon that he would speak on the bank’s situation on Monday. In a statement, Biden also said that he is “firmly committed to holding responsibility for this mess accountable and continuing our efforts to strengthen supervision and regulation of the big banks so that we are not in this position again.”

Fear about the fate of other banks

Some prominent Silicon Valley executives fear that if Washington doesn’t bail out the failed banks, customers will flock to other financial institutions in the coming days. Share prices fell over the past few days at other banks that stock tech companies, including First Republic Bank and PacWest Bank.

Among the bank’s customers are several companies from the California wine industry, where many wineries rely on Silicon Valley Bank for loans, and technology startups dedicated to combating climate change.

Tiffany Dufu, founder and CEO of The Cru, a New York-based women’s community and career coaching platform, posted a video Sunday on LinkedIn from an airport bathroom, saying the bank’s crisis tested her resilience. Because his money was tied up in Silicon Valley Bank, he had to pay his employees from his personal bank account. With two young children to support who are going to college, he said he was relieved to hear that the government was making a deposit.

“Small businesses and early stage startups don’t have much access to influence in this kind of situation, and we are often in a vulnerable position, especially when we have to fight hard to get a wire to your bank account to start, especially for me, as a founder black women,” Dufu told The Associated Press.

US Treasury Secretary Janet Yellen pointed to rising interest rates, which have been increased by the Federal Reserve to fight inflation, as a core problem for Silicon Valley Bank. Many assets, such as bonds or mortgage-backed securities, lose market value as rates rise.