Yahoo Finance OSFI has control of Silicon Valley Bank's assets in Canada. Here's what comes next
The Office of the Superintendent of Financial Institutions seized the assets of Silicon Valley Bank’s Canadian operations on the weekend after the California-based lender was shut down by U.S. authorities. But just what happens when Canada’s federal bank regulator takes over a financial institution, and what does it do with its assets? The Financial Post’s Stephanie Hughes unpacked the playbook.
What happened?
On March 12, OSFI seized temporary control of SVB’s Canadian business in order to protect creditors against further fallout from the Santa Clara-based bank’s collapse. The regulator added that it would be seeking permanent control of the assets and requested that Canada’s Attorney General apply for a winding-up order, a procedure in which assets are liquidated and distributed to a company’s creditors.
SVB operated in Canada as a foreign bank branch under OSFI’s supervision and as such did not hold any deposits from Canadians. It was one of four foreign bank branches prohibited under the Bank Act from accepting deposits or borrowing money from other financial institutions, alongside Crédit Agricole Corporate and Investment Bank, Credit Suisse AG’s Toronto branch and Natixis’ Canadian segment.
SVB primarily lent to corporate clients in Canada and had been a financier serving mostly tech startups south of the border. The failed bank had roughly $864 million worth of assets, including $406 million in deposits from regulated financial institutions and $435 million in business loans, according to regulatory filings.
What happens when assets are seized?
A spokesperson for OSFI said the superintendent “may do all things necessary or expedient” to protect SVB’s creditors.
“When the Superintendent has control of the Canadian assets of an authorized foreign bank, the foreign bank cannot deal in any way with the assets without the prior approval of the Superintendent or his representative,” the spokesperson said. “In addition, any person acting on behalf of the foreign bank does not have access to any cash or securities held in Canada.”
Has OSFI seized assets before?
The last time the regulator has done something similar to SVB was in February 2016 when OSFI announced it was temporarily seizing control of German-based Maple Bank GmbH’s Canadian branch. The move came as Germany shut down Maple Bank’s business in that country due to an investigation into alleged tax fraud.
A few days later, OSFI was granted a winding-up order for the bank and took permanent control of its assets.
The episode prompted the National Bank of Canada to take a write-down of $165 million, representing the full carrying value of its investment in Maple Bank. The Ontario Teachers’ Pension Plan also had a stake in the German bank.
An OSFI spokesperson said SVB and Maple Bank are the only two instances when the regulator seized Canadian assets of an authorized foreign bank.
What comes next?
OSFI has not said what will happen to SVB’s assets since supervisory information is kept confidential. However, it’s widely understood that the assets will be sold off in some way. U.S. officials made an unsuccessful first attempt to auction off SVB over the weekend, with the Wall Street Journal reporting a second attempt may be forthcoming.
John Ruffolo, founder and managing partner of Maverix Private Equity, said some of Canada’s banks would likely take a look under the hood if SVB’s Canadian assets were put up for sale, given the strength of the loan book.
“There would be lots of demand for that Canadian book, which would mean either a big U.S. bank or a big Canadian bank will ultimately be your lender,” Ruffolo said in an interview. “It’s a little unnerving, but it’s not a high-risk situation.”
In the United Kingdom, HSBC Holdings PLC brought SVB’s British operations for £1 after regulators seized assets over the weekend.
What is the government’s role?
OSFI is overseen by the finance ministry and that means Finance Minister/Deputy Prime Minister Chrystia Freeland has been involved in keeping an eye on developments in the SVB collapse. On Sunday, she said she had spoken with the heads of Canada’s financial institutions and the Bank of Canada, along with Routledge, and her office later confirmed that she had met with Routledge again on Monday.
“Significant structural and regulatory safeguards are already in place in Canada,” Finance Department spokesperson Adrienne Vaupshas said in an e-mail. “The government wants to assure Canadians our financial institutions are stable and resilient.”
Why is this different from the Financial Crisis?
Regulators on both sides of the border have taken a once bitten, twice shy approach to SVB’s collapse after parallels have been drawn between this episode and bank failures during the global financial crisis in 2008. It’s the right move to make to protect depositors, said former finance minister Joe Oliver.
“We have a very sound banking system in Canada,” Oliver said, adding that regulators have conservative rules preventing rash decisions that could imperil the financial system. “Canada’s ability to withstand previous crises have been noted around the world, and it’s because of the rules and the willingness to follow them. So, Canadians should feel, I think, comfortable with our banking system.”
Routledge has taken something of a conservative approach in his tenure at OSFI, pointing to the tightening of underwriting standards in the wake of the global financial crisis that could help protect the country from debt risks and exogenous shocks.
“I cannot overstate the strengthening of underwriting standards since that time and the strengthening of underwriting standards in Canada,” Routledge said in an interview in December.
• Email: shughes@postmedia.com | Twitter: StephHughes95
