Globe & Mail (x2)As usual, lots of wild speculation. Certainly a setback for AT but a run on the banks seems very unlikely. And the second article was very much a surprise and should prove to be positive for the markets in general. GLTA
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Silicon Valley Bank, one of the world’s most prominent technology financiers, failed Friday in the largest collapse of a U.S. bank since the 2008 credit crisis, stunning a sector already mired in a deep downturn.
The 40-year-old bank, a mainstay financier across the tech world, including a presence in Canada, was shut Friday by California’s Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation as receiver. The bank will reopen Monday and depositors will have access to insured deposits, though the amount is capped at US$250,000 per account.
The extent of the domino chain SVB’s fall has set in motion is unclear. The bank had US$209-billion in assets at the end of 2022, making SVB the 16th-largest bank in the United States and second-largest to fail in that country’s history, after Washington Mutual Inc. in 2008. SVB is a ubiquitous funder of venture-capital-backed startups, particularly in the U.S.
SVB’s clients include technology companies with deposit accounts, credit lines and callable loans, as well as company founders with individual SVB accounts and mortgages. Venture capital firms also hold money with SVB to fund deals.
After SVB Financial Group collapse, a bigger financial crisis seems unlikely. So why are investors nervous?
Liquidity crises could flare up and some companies may be unable to make payroll unless they can secure funds from investors who themselves have been hit by SVB’s collapse. Those hit include Toronto advertising technology company AcuityAds Holdings Inc., listed on the Toronto Stock Exchange, which revealed late Friday it had US$55-million deposited with SVB in the U.S., and just $6.7-million in non-SVB accounts.
Alex Meshkin, chief executive officer of San Francisco-based Flow Health Inc., tweeted that despite having no direct exposure to SVB, his company’s payroll processor used the bank, causing a delay in payments to Flow employees until the company could switch to JPMorgan Chase.
Laura McGee, CEO of Toronto startup Diversio Inc., said her company had an undisclosed portion of the US$6.5-million in venture capital it raised in 2021 in a U.S. SVB account. While Diversio has enough in other accounts to fund working capital, “we’ll be moving cash into accounts we feel are more safe,” she said. “I’m glad we don’t have to panic.”
Vancouver’s Dooly Inc., meanwhile, managed to transfer the 98 per cent of its cash it held in its U.S. SVB account – an amount in the high eight figures – to safety in a Royal Bank of Canada account Thursday, at the behest of two investors that day. “My heart was racing,” said Dooly CEO Kris Hartvigsen in an interview. “Fortunate is the best word to describe it. If you didn’t do that you were in a world of hurt.”
The shutdown of SVB stemmed from its decision in 2021 to pull back on lending and instead stash tens of billions into long-term, low-interest-rate mortgage-backed securities.
But as interest rates rose, bond values fell, saddling SVB with a paper loss, which it crystalized when it was forced to sell some bonds for a US$1.8-billion loss.
SVB revealed the loss and plans to hastily sell US$2.25-billion in shares on Thursday. That sent its stock price tumbling 60 per cent, and prompted calls by some venture capital firms for companies in their portfolios to pull deposits with SVB, which set off a run on the bank.
The bank’s shares were poised to plummet again Friday before trading was halted. Some news outlets reported the share sale fell through and that parent SVB Financial Group was looking for a buyer, and the FDIC stepped in.
“It’s a sobering reminder that a financial institution is built on trust and confidence, not deposits and loans,” said John Ruffolo, managing partner with Toronto-based technology financier Maverix Private Equity. “When that confidence drains away, the speed at which the organization falls is like a dam bursting.”
Mark McQueen, former head of Canadian Imperial Bank of Commerce’s innovation banking group, said “it’s such an unnecessary chain of events. I can’t believe it. It’s tragic.”
SVB’s collapse unsettled banking investors, and U.S., European and Canadian bank stocks fell Thursday and Friday. While banking analysts suggest the fallout will be contained, the episode brings back memories of the 2007-08 U.S. housing market bubble and financial crisis, which saw the failures of several U.S. financial institutions before central banks stepped in to prevent a broader collapse of the financial system.
Canadian tech industry players said they expect SVB’s collapse to have a limited immediate impact on the sector here, although there will be longer-term negative repercussions.
“This is not great for the technology ecosystem as a whole,” said Sid Paquette, head of RBCx, Royal Bank of Canada’s technology and innovation banking practice. “It’s one less financing source for technology companies, with amazing capabilities now that are potentially at risk of being lost. Competition is good – it makes everyone better.”
SVB received a licence from Canada’s banking regulator in 2019 to lend to companies here. It has faced heated competition here as banks built their own startup lending books to win business in a then-flourishing sector.
In total, SVB Canada 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. By comparison, CIBC had $2.9-billion in loans with its innovation arm on Oct. 31, 2021.
Canadian banks are broadly diversified and do not have the same concentrated exposure to the struggling tech industry as SVB. CIBC’s innovation banking division represents 0.5 per cent of total loans and deposits, according to CIBC analyst Paul Holden.
Overall bank deposits in Canada are growing, while they are falling in the U.S. OSFI also requires Canadian banks to hold extra capital as a cushion against downturns, giving them strong liquidity positions, Mr. Holden said in a note. “We do not think that deposit trends will force the liquidation of bond holdings, similar to SVB.”
Still, Canadian banks have exposure to the U.S., including Toronto-Dominion Bank, which is buying Tennessee-based First Horizon Corp., whose deposits decreased 10 per cent in the past two quarters.
Meanwhile, tech investors have been scoping their portfolios for SVB exposure. Three Canadian venture capitalists said in interviews their portfolios had little such risk. “We went through our portfolio, there’s a tiny bit of exposure, none of it is on the deposit side, so I don’t see it having an immediate impact,” said Michelle McBane, managing director with StandUp Ventures in Toronto.
She said StandUp had already received “unsolicited random reach-outs” from banks it doesn’t deal with. “I think everyone is going to step in to fill this hole” if SVB disappears, she said.
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China kept its central bank governor and finance minister in their posts on Sunday, an unexpected move at the annual session of the rubber-stamp parliament, during which they had been expected to be replaced.
President Xi Jinping, who has been installing allies in key roles amid a sweeping government reshuffle as he begins a third five-year term, opted for a measure of continuity in core policymaking positions as the world’s second-largest economy faces stiff challenges at home and abroad.
Yi Gang, 65, was approved by the National People’s Congress to remain governor of the People’s Bank of China (PBOC) and Liu Kun, 66, to stay on as finance minister.
“Opting for continuity in these critical economic roles suggests an emphasis on credibility and stability,” said Mattie Bekink, China director at the Economist Intelligence Corporate Network.
“It is also perhaps a tacit acknowledgment of some of the challenges for Beijing at the moment,” she said. “The real challenge for this third Xi administration is whether it will address structural imbalances in China’s economy and undertake reforms necessary to ensure China’s long-term competitiveness.”
The government has set a 2023 economic growth target of around 5%, up from 3% last year, which was among the weakest performances in decades.
The biggest change at the parliament session was the promotion on Saturday of Li Qiang, 63, a longtime Xi confidant, to premier. The former Shanghai Communist Party boss takes a role charged with managing the economy, replacing Li Keqiang, 67, who stepped down after two five-year terms.
“The government sent a positive signal to the market by keeping these senior financial experts in the cabinet,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management.
The U.S.-educated central bank chief Yi, appointed PBOC governor in 2018, had widely been expected to retire after being left off the ruling Communist Party’s Central Committee during the party’s once-in-five-years congress in October. Analysts had anticipated that once Yi and Liu stepped aside, they would be replaced by people with far less international experience.
“The U.S. side will be much more comfortable with someone like Yi Gang in charge,” said Alfred Wu, assistant professor at the Lee Kuan Yu School of Public Policy at the National University of Singapore.
“It shows China wants to at least have a dialogue with the United States on monetary policy and financial cooperation,” he said.
Sources had told Reuters last month that Zhu Hexin, chairman of state-run financial conglomerate CITIC Group Corp, was likely to succeed Yi as head of the central bank.
The appointments “indicate that the government put professionalism, management and the art of fine-tuning on the front burner when it comes to picking the central bank governor and finance minister, as positions at the helm of core economic departments need tremendous professional skill,” said Sun Fei, an economist.
As expected, Wang Wentao stays on as commerce minister.
Zheng Shanjie, governor and deputy party secretary of Zhejiang province, was approved to take over as head of the National Development and Reform Commission, the powerful state planner.