Silicon Valley Bank collapse: What’s next for banks and investors?

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Silicon Valley Bank’s collapse Friday marked the second-biggest bank failure in U.S. history after Washington Mutual in 2008.

The 40-year-old bank was shut down by California’s Department of Financial Protection and Innovation, sending shockwaves across global markets and leaving governments and tech CEOs scrambling to limit the impact of SVB’s sudden failure.

Following its collapse, state regulators closed New York-based Signature Bank Sunday – the third-largest failure in U.S. banking history.

Here is what you need to know about SVB’s and Signature Bank’s downfall, the implications for investors and the global economy and what comes next.

What is Silicon Valley Bank and what is it known for?

Silicon Valley Bank is one of the world’s most prominent technology financiers. Founded in 1983, it served technology workers and was a ubiquitous funder of venture capital-backed companies and startups.

SVB’s clients included technology companies with deposit accounts, credit lines and callable loans, as well as company founders with individual accounts and mortgages. Venture capital firms also hold money with SVB to fund deals.

The bank had US$209-billion in assets at the end of 2022, making it the 16th-largest bank in the United States.

What caused Silicon Valley Bank to collapse?

The shutdown stemmed from the bank’s 2021 decision to pull back on lending and instead stash tens of billions of dollars from the tech boom of the early pandemic days into long-term U.S. government bonds and mortgage-backed securities. When the U.S. Federal Reserve raised interest rates, the value of the bank’s investments plummeted, limiting its ability to meet customer withdrawal requests.

On Wednesday, it disclosed that it had sold US$21-billion in bonds – at a significant loss – to shore up its finances. It was also attempting to raise capital through additional share issuance.

On Thursday, SVB revealed a paper loss and plans to sell US$2.25-billion in shares. That sent its stock price tumbling 60 per cent and prompted calls by some venture capital firms for companies in their portfolios to withdraw deposits with SVB, which set off a run on the bank.

On Friday, U.S. regulators shut down the bank and froze US$175-billion in deposits. The frenetic two-day run blindsided observers and stunned markets, wiping out more than US$100-billion in market value for U.S. banks.

Why did Signature Bank get shut down?

The Federal Deposit Insurance Corporation (FDIC) took control of Signature Bank on Sunday, two days after U.S. regulators shuttered Silicon Valley Bank.

The commercial bank, known for being a big lender in the crypto industry, had US$110.36-billion in assets and US$88.59-billion in deposits at the end of 2022. As of September, almost a quarter of its deposits came from the cryptocurrency sector, but the bank announced in December that it would shrink its crypto-related deposits by US$8-billion.

U.S. regulators, in an attempt to prevent a further banking crisis after SVB’s fall, closed Signature Bank, citing “systemic risk.”

“We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority,” the Treasury Department, Federal Reserve and FDIC said in a joint statement.

Who owns Silicon Valley Bank now?

In Canada, the Office of the Superintendent of Financial Institutions (OSFI) announced on Sunday that it had taken control of Silicon Valley Bank’s Canadian arm and had plans to wind it down. OSFI asked for the winding up order, a court order that forces an insolvent company into liquidation, and it was approved on Wednesday – shifting its assets to a new company overseen by the U.S. banking regulator.

The Bank of England and U.K. Treasury said Monday that they had facilitated the sale of Silicon Valley Bank’s U.K. arm to HSBC. HSBC bought the U.K. arm for a symbolic one pound, securing £6.7-billion of deposits.

In the United States, the two largest banks – JPMorgan Chase and Co. and Bank of America Corp. – are considered the most likely bidders.

The Federal Reserve and the FDIC said in a joint statement late Sunday that the latter will ensure all SVB depositors are fully covered for their losses. The statement said taxpayers will not be on the hook for the rescue. Any losses to the federal deposit insurance fund, which will pay out uninsured depositors, will be recovered by a special assessment on banks – a levy that will make banks share the cost of any losses.

Depositors at Silicon Valley Bank and Signature Bank, including those whose holdings exceed the $250,000 insurance limit, will be able to access their money Monday.

On Monday, the FDIC transferred all deposits of the failed SVB to a newly created bridge bank named Silicon Valley Bank N.A.

What does this mean for other banks in the U.S. and Canada?

U.S. President Joe Biden said the U.S. banking system is “safe” during a speech Monday to address global markets after the SVB collapse.

“Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” Mr. Biden said.

He said the banks’ management should be fired and investors will lose money, but he also promised stiffer bank regulation. “I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely this kind of bank failure will happen again, and to protect American jobs as a small business,” he said.

On Monday the Federal Reserve also announced the creation of a new Bank Term Funding Program aimed at safeguarding deposits and institutions such as banks and credit unions affected by market instability.

In Canada, OSFI will start daily check-ins with domestic banks that will enable it to monitor their liquidity. The frequent updates are a precautionary tool last used in the early months of the COVID-19 pandemic, designed to provide an early warning if any signs of stress emerge.

Some of Canada’s largest banks are also pro-actively and aggressively soliciting Silicon Valley Bank clients as the sale process stalls in the United States. At least three Canadian lenders are looking to pick off SVB clients: Bank of Montreal, Royal Bank of Canada and Canadian Imperial Bank of Commerce.

What does this mean for the economy?

The collapse of Silicon Valley Bank is sharpening the tension between fighting inflation and managing financial stability risks. Since the bank’s downfall, investors have slashed their bets on additional interest rate hikes by the U.S. Federal Reserve and the Bank of Canada.

As recently as last week, markets were expecting the U.S. central bank to increase its benchmark interest rate by another percentage point in the coming months, and to hold off rate cuts until 2024. But by Monday, markets were doubting that the Fed will raise rates at all at its next meeting on March 22, and pricing in cuts by this summer.

The abrupt shift in interest rate expectations roiled global bond markets. Two-year U.S. Treasury bond yields fell by 100 basis points over the past three trading days, the swiftest drop since the 1980s. Yields on two-year Government of Canada bonds dropped 42 basis points on Monday alone.

How will SVB’s collapse impact Canada’s tech sector?

While Canada’s technology sector is poised to emerge largely unscathed from the failure of Silicon Valley Bank, worries remain about the long-term impact of the bank’s demise.

One major worry is that the sector, which entered a sharp downturn in late 2021, will continue scaring off investors. Valuations crashed last year, and tech companies – including Canadian employers Shopify and Lightspeed – have laid off more than 300,000 people globally.

The other worry is that the disappearance of SVB, a core financier of tech companies for decades, will further tighten available capital for startups that have already had to slash spending in the face of dwindling investor interest. Collectively, those companies have driven job growth and wealth creation for years.

With reports from Stefanie Marotta, Sean Silcoff, Andrew Willis, James Bradshaw, David Berman, Mark Rendell, The Associated Press and Reuters.