Governments in the U.S., Britain and Canada are taking extraordinary steps to prevent a potential banking crisis after the failure of California-based Silicon Valley Bank prompted fears of a broader upheaval.
U.S. regulators worked through the weekend to find a buyer for the bank, which had more than $200 billion in assets and catered to tech startups, venture capital firms, and well-paid technology workers.
While those efforts were not successful as of Monday morning, officials assured all of the bank’s customers that they would be able to access their money.
Late on Sunday, Treasury Secretary Janet Yellen announced that all depositors will have access to their funds, no matter how much they had in the bank.
“Small businesses across the country that have deposit accounts at these banks can breathe easier knowing they will be able to pay their workers and pay their bills,” U.S. President Joe Biden said at a press conference on Monday morning.
“Hard-working employees can breathe easier as well,” Biden said, stressing that the bill for that safeguard will not be borne by taxpayers and will instead come out of the fees that banks pay for deposit insurance, which is run by the Federal Deposit Insurance Company, or FDIC, and by law only covers the first $250,000.
Karl Schamotta, chief market strategist for Corpay, says the collapse of Silicon Valley Bank could mean a ‘turbulent’ time for Canadian investors.
Investors in the bank, however, will likely be wiped out. “They knowingly took a risk and when the risk didn’t pay off, investors lose their money,” Biden said. “That’s how capitalism works.”
Management at the bank has been fired, Biden noted. “If a bank is taken over by FDIC, the people running the bank should not work there anymore,” he said.
The early response from investors was mixed, with shares in Canada’s five biggest banks down by between two and four per cent in early trading. Major U.S. lenders like JPMorgan, Citibank and others were down slightly as well, but several U.S. banks saw large losses.
Shares in California-based First Republic Bank, which saw long customer lineups over the weekend, were down 66 per cent before trading was halted. Western Alliance Bancorp was down by 77 per cent. PacWest lost half its value, Comerica was off by 40 per cent while Charles Schwab was down by 15 per cent.
Karl Schamotta, chief market strategist with Corpay, says volatility on the stock market is likely in the short-term at least.
“We had years of very, very cheap money but now we’ve seen rates move up at perhaps the sharpest pace in modern history — and we’re now beginning to see things break” he told CBC News in an interview Monday.
“Investors need to brace themselves really, for a very turbulent period ahead.”
That turbulence extends to companies that use the bank, too, despite news on Monday that deposits will be safe.
Technology company Avahi uses SVB extensively, and CEO Jack Singh told CBC News on Monday that last week was a whirlwind.
Jack Singh, CEO of Avahi Inc., says his company is still anxious about not having access to their funds in Silicon Valley Bank, and is looking at how to avoid similar situations in the future.
He says the company first got word that something was afoot on Thursday and tried to move money around but was unsuccessful. “Friday was payroll. We were panicking because that’s the bank that we bank with on the business side,” Singh said. He said he managed to pay the company’s bills on Friday by using personal and other funds.
He says he’s relieved to know the company’s funds are safe, but that doesn’t mean everything is normal.
“We are anxious, sitting around on pins and needles,” he said. “We still don’t have access to the funds — we are able to log into our account but we are not able to move the money around just yet so we don’t know when that’s available to us.”
Governments beyond U.S. respond
The assurances came as part of an expansive emergency lending program intended to prevent a wave of bank runs that would threaten the stability of the banking system and the economy as a whole.
In Britain, the U.K. Treasury and the Bank of England announced early Monday that they had facilitated the sale of Silicon Valley Bank UK to HSBC, Europe’s biggest bank, ensuring the security of 6.7 billion pounds ($11.1 billion Cdn) of deposits. HSBC paid the nominal sum of one pound to take over the assets.
While the bank is small, with less than 0.2 per cent of U.K. bank deposits according to central bank statistics, it had a large role in financing technology and biotech startups that the British government is counting on to fuel economic growth.
Jeremy Hunt, the U.K. government’s Treasury chief, said that some of the country’s leading tech companies could have been “wiped out.”
“When you have very young companies, very promising companies, they’re also fragile,” Hunt told reporters, explaining why authorities moved so quickly. “They need to pay their staff and they were worried that as of 8 a.m. this morning, they might literally not be able to access their bank account.”
He stressed that there was never a “systemic risk” to the U.K.’s banking system.
Classic ‘bank run’
Regulators in the U.S. rushed to close Silicon Valley Bank on Friday when it experienced a traditional bank run, where depositors rushed to withdraw their funds all at once. It is the second-largest bank failure in U.S. history, behind only the 2008 failure of Washington Mutual.
In Canada, the Office of the Superintendent of Financial Institutions took temporary control of the bank’s Canadian subsidiary over the weekend. While the Canadian arm has no commercial or individual deposit accounts, it does have about $864 million worth of business loans on its books.
“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,” Superintendent Peter Routledge said in a statement.
In a sign of how fast the financial bleeding was occurring, regulators announced that New York-based Signature Bank had also failed and was being seized on Sunday.
At more than $110 billion in assets, Signature Bank is the third-largest bank failure in U.S. history. Another beleaguered bank, First Republic Bank, announced Sunday that it had bolstered its financial health by gaining access to funding from the Federal Reserve and JPMorgan Chase.
Extensive government intervention
Silicon Valley Bank began its slide into insolvency when it was forced to dump some of its Treasuries at a loss to fund its customers’ withdrawals. Under the Fed’s new program, banks can post those securities as collateral and borrow from the emergency facility.
The Treasury has set aside $25 billion US to offset any losses incurred under 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 posted as collateral have a very low risk of default.
Though Sunday’s steps marked the most extensive government intervention in the banking system since the 2008 financial crisis, the actions are relatively limited compared with what was done 15 years ago. The two failed banks themselves have not been rescued, and taxpayer money has not been provided to them.
U.S. President Joe Biden said Sunday evening that he would speak about the bank situation on Monday. In a statement, Biden also said he was “firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.”
Fears about fate of other banks
Some prominent Silicon Valley executives feared that if Washington didn’t rescue the failed bank, customers would make runs on other financial institutions in the coming days. Stock prices plunged over the last few days at other banks that cater to technology companies, including First Republic Bank and PacWest Bank.
Among the bank’s customers are a range of companies from California’s wine industry, where many wineries rely on Silicon Valley Bank for loans, and technology startups devoted to combating climate change.
Tiffany Dufu, founder and CEO of The Cru, a New York-based career coaching platform and community for women, posted a video Sunday on LinkedIn from an airport bathroom, saying the bank crisis was testing her resiliency. Given that her money was tied up at Silicon Valley Bank, she had to pay her employees out of her personal bank account. With two teenagers to support who will be heading to college, she said she was relieved to hear that the government’s intent is to make depositors whole.
“Small businesses and early-stage startups don’t have a lot of access to leverage in a situation like this, and we’re often in a very vulnerable position, particularly when we have to fight so hard to get the wires into your bank account to begin with, particularly for me, as a Black female founder,” Dufu told The Associated Press.
U.S. Treasury Secretary Janet Yellen pointed to rising interest rates, which have been increased by the Federal Reserve to combat inflation, as the core problem for Silicon Valley Bank. Many of its assets, such as bonds or mortgage-backed securities, lost market value as rates climbed.
