OSFI takes control of Silicon Valley Bank’s Canadian unit

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Canada’s banking regulator took control of Silicon Valley Bank’s domestic operations on Sunday, as governments, along with tech sector CEOs, spent the weekend scrambling to limit the impact of a leading global technology financer’s sudden collapse.

In the latest chapter of California-based Silicon Valley Bank’s stunning fall, superintendent of financial institutions Peter Routledge took over the Canadian arm of a business that was the go-to lender for tech companies. He announced plans to wind it down, potentially by selling the business.

“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,” Mr. Routledge said in a release. “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.”

U.S. regulators shut down SVB on Friday, freezing US$175-billion in deposits, after customers withdrew billions last week on solvency concerns at the 40-year-old lender that dominates the innovation economy. The largest U.S. bank failure since the 2008 global financial crisis left clients scrambling for the money needed to pay employees this week, while U.S. regulators attempted to contain the damage.

The Federal Reserve and the U.S. Federal Deposit Corp. said in a joint statement late Sunday that the FDIC will ensure all SVB depositors are fully covered for their losses. The statement said taxpayers will not be on the hook for the rescue, with any losses recovered by a special assessment on banks.

The Federal Reserve Board also announced it will make funding available to other banks to ensure they “have the ability to meet the needs of their depositors,” calming concerns about potential contagion.

“We want to make sure that the troubles that exist at one bank don’t create contagion to others that are sound,” U.S. Treasury Secretary Janet Yellen said earlier Sunday in an interview on television program Face The Nation. U.S. Federal Deposit Insurance Corp. is currently running SVB.

U.S. regulators spent the weekend working with SVB executives, customers and rival banks on a rescue package. “We’re very aware of the problems that depositors will have, many of them are small businesses that employ people across the country,” Ms. Yellen said.

SVB is a relatively small lender in Canada. Four years after opening its doors, the bank had US$692-million in assets and US$349-million in outstanding loans as of December, according to filings with the Office of the Superintendent of Financial Institutions. That’s a fraction of the tech loan portfolios at major Canadian banks. However, SVB is a major provider of U.S. bank services to the American operations of Canadian tech companies, and to U.S. businesses that have investments from Canadian fund managers.

OSFI officials said they have been closely monitoring SVB since the bank first reported significant losses last week, and announced plans to raise US$2-billion in new capital. News of the financing triggered the run on the bank that led to its failure.

Officials at the federal Department of Finance and the Department of Innovation, Science and Economic Development worked with the bank’s executives, rival lenders and industry groups on the weekend to help businesses navigate the failure.

“We are monitoring the situation and are closely in touch with leaders in the startup and venture communities,” Laurie Bouchard, spokesperson for Industry Minister François-Philippe Champagne, said Sunday.

At the Finance Department’s request, the Council of Canadian Innovators went to its 150 members over the weekend to gauge the fallout from SVB’s failure. The department “wants to know the size and scope of companies that are impacted,” said CCI president Ben Bergen.

Based on member responses, he said the U.S. bank’s closing “does not seem to be a systemic issue for our companies.”

In the technology sector, some still fear SVB’s collapse could trigger a broader banking crisis, with other banks forced to cut lending as customers pull deposits.

“We might be moving from specific company exposure risk to systemic risk,” said John Ruffolo, vice-chair of the CCI and founder of Maverix Private Equity. “We hope there is not systemic risk because then the dominoes fall.”

OSFI held a series of calls with major Canadian banks throughout Saturday and Sunday, according to two sources with knowledge of the discussions. The calls, most of which were held with individual banks, focused on two key issues.

OSFI sought assurances that the country’s banks were isolated from the fallout from SVB’s collapse and have no significant risks to their portfolios. The regulator also explored issues relating to the wind-up process that it initiated on Sunday, including soliciting bids for portfolios of SVB’s assets, though banks are wary of the potential risks in acquiring them. The Globe and Mail is not identifying the sources because they are not authorized to discuss confidential discussions with the regulator.

Analysts said SBV’s business model, which is narrowly focused on technology companies, means regulators should be able to contain fallout from its failure.

“We believe the failure of Silicon Valley Bank to be idiosyncratic and unlikely to cause contagion to the broader financial system,” said analyst Darko Mihelic at RBC Capital Markets in a report on Sunday. “All the same, shorter term, we will be watching credit spreads, regulatory actions, economic data (especially from California), and numerous other indicators for signs of financial stress,” he said.

In venture capital and private equity circles, SVB was a dominant player, serving as the bank to more than 2,500 venture capital fund managers. Executives in the industry spent the weekend lobbying other lenders to step up and fill the void left by SVB.

“The community is pushing that it’s important that other banks extend balance sheet, and don’t retreat,” said Adam Felesky, co-founder and chief executive officer of Toronto-based Portage. “The overtures thus far have been quite good from banks in Canada and elsewhere,” he said.

One option for regulators is selling all or part of SVB to a rival bank. In England, tech-focused Bank of London announced on Sunday it had teamed up with private equity funds to make a formal offer for SVB’s British operations.

In the United States, the two largest banks – JPMorgan Chase and Co. and Bank of America Corp. – are considered the most likely bidders, owing to their strong balance sheets.

“This asset is such an incredible brand, they’ve been a supporter of the best entrepreneurs in the world for over 40 years,” said Mr. Felesky. “I can’t imagine that there isn’t a goodwill value that a large bank in the U.S. or elsewhere wouldn’t step in and acquire.”