The collapse of Silicon Valley Bank: What does it mean?

The collapse last week of Silicon Valley Bank, as depositors clamored for money, has sent ripples through the financial system.

Here’s a quick look at the situation:

What is Silicon Valley Bank?

Silicon Valley Bank is the 16th largest bank in the U.S. At the time of its failure, the bank, based in Santa Clara, California, had $209 billion in total assets, the Federal Deposit Insurance Corporation said.

Who uses the bank?

As expected from its name, the bank caters to companies in the technology sector, as well as the healthcare sector.

How did he get into trouble?

Two factors: a slowdown in venture capital funding in the technology sector and rising interest rates.

Faced with a limited ability to raise new capital, some bank customers must approve deposits to meet their obligations. At the same time, banks use these deposits to invest in bonds.

Amid the current trend of rising interest rates, bonds issued by these banks are paying less than bonds issued more recently. As customers demand money, the bank must unload the bond investment at a loss.

Eventually, the bank went bankrupt.

What happens next?

The US government stepped in on Friday to seize the assets of Silicon Valley Bank, which has been transferred to a new entity. The collapse of the bank was the second largest bank failure in US history, after the collapse of Washington Mutual in 2008.

Reflecting how dire the situation is, US regulators also moved to seize Signature Bank of New York on Sunday after it collapsed.

The Canadian government’s Office of the Superintendent of Financial Institutions (OSFI) took temporary control of Silicon Valley Bank’s 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.

Karl Schmotta, chief market strategy for Corpay, said the move OSFI means they will look to sell off the assets of the Canadian unit and essentially “ringfence” the Canadian banking sector against any further systemic risks that could come from the collapse.

Meanwhile, the British Treasury and the Bank of England said that they have facilitated the sale of Silicon Valley Bank UK to HSBC, Europe’s largest bank, for a nominal amount of one pound. The move ensures the safety of 6.7 billion pound ($11.1 billion Cdn) deposits.

What are the implications for Canada?

While Schmotta said the impact of foreclosures in Canada will not be large, bank losses from Canada’s venture sector “will reduce flows into the sector in the coming months and years.”

“This is unfortunately dragging down Canada’s long-term productivity,” he said.

Schmotta also said investors should brace themselves for “a very turbulent period.”

WATCH | What does the collapse of Silicon Valley Bank mean for Canada?