The fate of Silicon Valley Bank in Canada remained unclear Monday afternoon after the country’s banking regulator took control of the failed tech lender following its swift collapse on Friday. 

The intervention from Canada’s Office of the Superintendent of Financial Institutions (OSFI) came Sunday, as regulators try to assuage fears that SVB’s downfall, the second-largest U.S. banking failure in history, could trigger a broader financial crisis. But by Monday afternoon, regulators on either side of the border still had yet to provide options for the future of SVB Canada, including whether it will be included in the sale of the U.S. entity or sold separately to a Canadian competitor. 

The Federal Deposit Insurance Corporation, the U.S. agency now controlling the bank, told The Logic, “We are not discussing details.” OSFI declined to answer The Logic’s questions. “Both OSFI and the financial institutions it works with are required, under the OSFI Act, to keep specific supervisory information confidential,” spokesperson Elizabeth Roach said by email. “We will share more information as it becomes available.”

The silence has left tech leaders and investors grasping for answers on the fate of the bank in Canada. 

“This is an important question: What’s OSFI going to do?” said a Canadian investor in the venture debt space who is waiting for cues from the regulator. “They’re not saying anything,” said the source, whom The Logic agreed not to name so they could speak freely about confidential information. “Can we buy SVB’s assets? Can we buy it and then administer it? I don’t know.” 

Matchmaker, matchmaker: 

On Sunday, The Globe and Mail reported that OSFI had sought bids for SVB’s portfolio from some other financial institutions, citing confidential sources.

The tech bank’s Canadian book is attractive, a source with knowledge of its operations here told The Logic. However, tech executives and venture capitalists say Canadian banks have been active in the venture-debt market over the last few days. RBC, CIBC and other banks have been “offering paper to SVB clients,” the source said. “That book, in a matter of time, will basically get dispersed to the Canadian banks.”

Domestic financial institutions may not need to bid on the portfolio to win SVB’s Canadian clients. “The borrower can get refinanced by a different lender,” noted Alkarim Jivraj, CEO of Toronto-based Espresso Capital, a venture-debt firm. “If the government wanted to, I’m sure they could facilitate a transfer of [SVB’s] portfolio to a Canadian bank,” he said. But all the domestic financial institutions interested in the venture-debt business are already in it—they don’t need SVB’s book as a starting point, he said. “It wasn’t a deposit-taking institution, so it’s not as though it offered anything special.”

Espresso offers both first- and second-lien loans, meaning it shares tech clients with banks like SVB, and also competes for them. Canadian borrowers account for only a tenth of its loan portfolio, with the U.S. making up 80 per cent. Jivraj cited both local conditions and size. In Canada, private lenders must compete against not only the big banks, but the government, as well, via the debt offerings of the Business Development Bank of Canada and Export Development Canada, he said. And the “niche in the U.S. where we play is bigger than the entire Canadian market.” 

Weekend update: 

Meanwhile, officials in Ottawa spent Saturday and Sunday monitoring the fallout of SVB’s collapse on Canada’s tech sector. Finance Minister Chrystia Freeland was in contact with Maverix Private Equity managing partner John Ruffolo on Friday. Her office sought “an assessment of, ‘What’s the impact?’” said Benjamin Bergen, president of the scale-up lobby group Council of Canadian Innovators (CCI), of which Ruffolo is vice-chair. “That is actually a positive sign—it means they’re obviously listening to what’s going on in the ecosystem.” 

On Saturday morning, the CCI launched a survey to gauge the effects of SVB’s closure on its scale-up members and similar firms, and shared the results with federal finance department officials Sunday. “The findings really were: ‘In the short term, it’s going to be OK,’” said Bergen. “Very few firms are actually impacted.” 

Also on Sunday night, Freeland tweeted that she’d been “receiving regular updates” on the SVB situation, and had spoken with “financial-sector leaders and the Bank of Canada.” In an email to Finance officials shortly after, Ruffolo noted the importance of such a statement and said the government should “ensure OSFI is watching out for similar risks” in Canada.

Northern exposure:

SVB didn’t operate a deposit business in Canada, which has mitigated the overall impact of its collapse in this country. That said, many Canadian companies with business in the U.S. had opened deposit accounts with the bank. 

AcuityAds, a Toronto-based digital-ad company, with US$55 million on deposit with the bank, said Monday that it’s been working over the last two days “to ensure that its operations can rely solely on its other banking relationships,” and that it expects “its cash situation will be resolved without any interruption to its ordinary course operations and without it incurring any financial losses.” 

Sonder, a Montreal-founded travel-tech startup, said Saturday it had about US$20 million in deposit accounts with SVB, plus a US$60-million line of credit, US$13 million of which it has tapped for letters of credit.

Other Canadian firms with SVB accounts include Shopify, Lightspeed, Coveo, D2L and BlackBerry, according to a TD analyst note circulated Monday. However, their exposure was fairly limited, the note states. “Few companies in our coverage have direct business with SVB, but those that do are not expected to be materially impacted,” it said. 

Of the 64 firms that responded to CCI’s Saturday survey, just 9.3 per cent had deposits with SVB above the FDIC insured limit of US$250,000 or had untapped lines of credit that are essential to making payroll or operating expenses. But the U.S. regulator has now guaranteed that cash, mitigating the risk to them, Bergen noted. 

While Espresso’s Jivraj said the loss of SVB “shouldn’t be materially impactful to Canadian companies” given the alternatives available, Bergen expressed concern that SVB’s collapse could negatively affect companies’ ability to fundraise in what’s already a tight market for capital. “It’s making other innovation bankers more nervous,” one respondent wrote in CCI’s survey; the association did not identify participants.

Some Canadian venture firms are helping their portfolio companies deal with any liquidity problems. SVB was “an important partner” to Montreal-headquartered Inovia Capital’s portfolio companies, said partner Chris Arsenault, although more recently domestic banks combined to make up a larger share of their borrowing. Since SVB couldn’t take deposits here, the Canadian Inovia-backed firms that banked with it typically only ran U.S. payroll out of those accounts. 

“We only had two companies that had a potential risk related to being able to do payroll or not this week,” said Arsenault. He said Inovia has offered both short-term loans to tide them over, although the financing may not be needed if the firms regain access to their deposits at SVB as promised. Still, he predicted startups will take the lesson to diversify their cash stores: “As of tomorrow, any company that only has one bank will need to open a second account for operations.” 

The Shopify backstop:

Shopify suffered “very minor impact” from SVB’s collapse, said CEO Tobi Lütke in a tweet, as it works with more than a dozen banks. “Though we are making some adjustments to account for these developments, we expect to be fully back to business as usual shortly,” said spokesperson Jackie Warren in an email to The Logic.

In the meantime, the Ottawa-headquartered commerce firm extended a helping hand to the merchants that use its products and services, offering to cover payroll to those who can’t access their SVB-held funds.

Shopify will open accounts through its money-management service Balance for merchants who signal they need help and put enough money in it to pay their employees, according to a letter from chief operating officer Kaz Nejatian, which Shopify sent to merchants Sunday. “Don’t worry about signing anything for now,” the letter said. “Pay us back with no interest when you get your SVB funds unfrozen.” Warren did not respond directly to The Logic’s questions, but sent a statement saying the company is “doing everything we can to help” merchants. 

Nejatian tweeted on Sunday that Shopify’s gesture was not unique, saying he knew five people who’d offered payroll assistance to startups.

Meanwhile in America:

U.S. President Joe Biden offered assurances that SVB clients’ deposits were safe and that they would regain access to their accounts starting Monday. Taxpayers wouldn’t bear any losses, he said, while pledging to strengthen banking regulation in the country, after an 2018 partial repeal raised the threshold for regulatory oversight of mid-sized banks. “Americans can have confidence that the banking system is safe,” Biden said in a statement from the White House. 

Still, investors were wary Monday, with stocks of several banks down considerably. California-based First Republic plunged more than 60 per cent, with other regional lenders like Western Alliance Bancorp and PacWest Bancorp down around 50 per cent and 20 per cent, respectively. On Sunday, New York state regulators closed the crypto-friendly Signature Bank following a rush of deposit outflows in the wake of SVB’s fall. 

A keenly felt absence: 

While Canada’s direct exposure to SVB is relatively limited, on Monday it still appeared that its collapse could have a systemic impact on the country’s tech ecosystem, said one Canadian investor. Part of what made SVB loans attractive was their low interest rates. With the bank gone from the market, clients have two alternatives, said the source: “Either they refinance at much higher interest rates and even then, the banks are only going to pick the best risk because they have very little appetite for risk,” they said. “Or they refinance with equity at a much lower valuation.

“A lot of startups are going to be hurting,” they said. “There will be more layoffs, more startups closing.”

Eytan Bensoussan, co-founder and CEO of the financial-technology company NorthOne, agreed that the failure of SVB leaves a void. The bank excelled at recognizing firms with good prospects from a VC perspective, he said—companies that conventional financial institutions would reject. “They were very good at looking through what, to many banks, would look like a black box and actually seeing a lot of value and getting them bank accounts, et cetera,” Bensoussan said.

Already, Canadians are casting about for alternatives, he added, seeking U.S.-domiciled accounts at American banks in “a many-months-long process” laden with bureaucracy. “That’s a huge issue,” Bensoussan said. “Like just on a day-to-day basis, I’ve received at least a dozen calls from people who are desperately trying to figure out how to get a [U.S.] bank account for their business.”

Making a market:

In the letter it sent to clients Monday, TD analysts said there could be a “silver lining” to the SVB debacle for some Canadian companies. “Companies with a strong balance sheet and minimal exposure to SVB could acquire some attractive technology/businesses if challenges drive lower valuations,” they wrote. 

But 2023 was already set to be a blockbuster one for M&A, as executives at companies struggling to match the “very high” valuations of their last rounds a year or two ago decide whether to stick it out or sell, said Arsenault. Now that regulators have stepped in and promised that SVB depositors will be made whole, he doesn’t anticipate an increase in dealmaking as a result of the bank’s collapse. “Right now, I don’t think it’s bigger than what it was the week before,” he said.