What SVB’s Collapse Means for the Canadian Economy

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The collapse of Silicon Valley Bank, or SVB, earlier this month has shocked the tech and banking industries across North America. The Santa Clara, California-based lender had customers that included start-ups such as HR and payments firms wave And Major tech companies like Roku, It folded in March due to a bank run, leaving it second biggest failure of a financial institution in American history.

California regulators shut down SVB On March 10 after the stock of the bank fell up to 60 percent In a single day, handing over control to the Federal Deposit Insurance Corporation (FDIC). The FDIC said all insured depositors would have full access to their funds, but the bank failure with companies north of the border is raising concerns that something similar could happen in Canada.

Here’s what you need to know about the collapse of SVB and what it means for Canada’s tech and banking sectors.

What is the reason for the downfall of SVB?

The bank shutdown was triggered by a combination of rising interest rates, panicked customers, and Allegedly, poor oversight and risky practices by the executive team of the lender. At the start of the pandemic, the SVB was using depositors’ money to buy government-backed bonds – assets often considered “safe”. But as interest rates rose, those bonds lost value. SVB was sitting on more than US$17 billion in potential losses on those assets at the end of 2022. According to wall street journal,

early March, SVB announced that it sold a bunch of its securities portfolio at a loss shore up its balance sheet, The news sent shockwaves among VC firms. Realizing that the bank was in a precarious position, the VCs reportedly asked start-ups to pull their money out of SVB. Depositors panicked and began withdrawing large sums; svb faced US$42 billion in withdrawal requests a day, The lender had no way to pay back that cash, so regulators intervened and shut down the bank.

What the collapse of the SVB means for Canada’s start-up sector

SVB was a major resource for start-ups, both as a lender and investor. Bank worked with companies in US, UK, China and Canadaamong others. evelyn adomatAn economics professor at the University of Guelph predicts that companies that have taken loans from other lenders should be unaffected by SVB losses, but newer start-ups could struggle. Losing SVB as a lending option could chill the start-up space, as fewer companies are able to secure funding to get off the ground.

Canadian start-ups may be feeling the effects of the collapse when trying to raise capital. Many investors and VC firms—especially those with at-risk start-ups affected by the bank failure—are on the sidelines, and some are not looking back on additional ventures right now because of the volatile economic landscape. Patrick Lorre, managing partner at Calgary-based Panache Ventures, told financial position He is worried that the demise of SVB will lead to a loss of confidence in the start-up sector and entrepreneurs will be busy. “I think the last thing anybody thinks about is, ‘Is my bank going to fail?’ We haven’t had one of those for a while,” he told the outlet.

Investment in Canada had already begun to wane before the SVB failure, with companies raising $14 billion in 2021 rising to $9.7 billion in 2022, according to funding tracker data. briefed.in, Start-ups are often considered a risky investment, as accept it fail in their first year and more than two thirds never give positive returns to investors, “I think there are going to be fewer lenders willing to lend to new start-ups,” Adomat says. “Until someone comes along and makes a program for start-ups.”

Banks are one funding route, but interest rates have soared since the pandemic hit rock-bottom rates, so borrowing costs more. “You have to find a bank that is willing to lend to you,” says Adomat. “Canadian banks are surprisingly stable, and they generally don’t lend a lot of money to start-ups.”

What the SVB collapse means if you work in a tech company

If you are working in tech then you don’t need to panic and start job search now. According to experts, the collapse of SVB does not mean that there will be mass layoffs in Canada. Benjamin Bergen, President council of Canadian Innovators (CCI), says some Canadian firms had deposits with SVB. and those who were granted access to their accounts by regulators, along with covering the FDIC’s losses.

Bergen explains that before the collapse, The slowdown was already visible in the tech sector With companies like DeepMind and Meta making the cut. But despite this tightening of the belt, many Canadian start-ups are still hiring. “It is still a challenge for our CCI member companies to find highly skilled workers,” says Bergen. “There’s still a tremendous amount of jobs out there.”

For Canadians working for US companies, whether they are affected will depend on the company’s funding position. Early-stage start-ups trying to generate revenue and secure funding may have to sell or close, while more established companies must have some runway with funding and loan limits from other investors and banks. Few US companies have been transparent about the financial issues they are facing with the collapse of SVB: Rippling CEO Parker Conrad Liquidated US$130 million Market funds of your own company so that its affected clients can meet their payroll.

Even if some American start-ups close, Bergen does not expect American workers to flee north in search of job stability. What will bring American workers to Canada is a thriving tech sector, especially since remote work Has changed the way tech companies hire. “It’s less about Canada versus America,” he says, “and more about whether you are a successful candidate.” In other words, tech companies recruit based on skill rather than nationality.

What the collapse of SVB means for Canadian banks

There was some panic following the collapse of the SVB along with Canada’s main stock index. 0.9 percent decline Fearing contagion risk, investors sold banking stocks. But, the good news is that unlike the SVB, the Bank of Canada has little chance of collapse, Adomat says. This means that start-ups who have borrowed money from local institutions need not worry. Canadian banks invest in financial derivatives, which are investments that are not affected by interest and exchange rates. Banks don’t make a lot of money from these investments, but they don’t lose a lot of money either.

Also, Adomat says that none of Canada’s six major banks focus on only one part of the economy. They have depositors from a wide variety of industries, which means that if one sector tanks, the bank will be stable. Bergen agrees. “Canadian banks are so big and you have so many different deposit holders that the idea of ​​all of them pulling their money together and leaving at once is unlikely,” he says.

In response to the collapse of the SVB, the Canadian Office of the Superintendent of Financial Institutions (OSFI), which regulates banks, acquired the Toronto branch of SVB, SVB operated in Canada as a foreign bank branch under the supervision of OSFI, and as per its regulations, did not hold deposits from Canadians, as informed by financial position,

“It is important to note that the issues experienced by Silicon Valley Bank are unique to this institution,” a spokeswoman for the regulator said in an email. there are rules Institutions are required to maintain adequate levels of capital and liquidity to help protect them from significant periods of economic stress.

“Canadians can be assured that OSFI is always working diligently behind the scenes, making decisions and taking actions to protect depositors and creditors.”

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