It’s been a week since the California Department of Financial Protection closed the Silicon Valley Bank (US:SIVB) and appointed the Federal Deposit Insurance Corporation (FDIC) as a receiver.

The volatility in the U.S. banking sector has been off-the-charts as Americans worried that more banks would crumble as depositors moved their cash to bigger, more stable banks such as JPMorgan & Chase (US:JPM).

On March 16, 11 of the big U.S. banks, including JPMorgan, agreed to move US$30 billion in uninsured deposits to the First Republic Bank (US:FRC) to reinforce the overall strength of the banking system.

“This action by America’s largest banks reflects their confidence in First Republic and in banks of all sizes, and it demonstrates their overall commitment to helping banks serve their customers and communities,” the group of 11 banks said in a statement.

How Safe?

Here in Canada, questions have arisen about the safety of the Canadian banking system.

“Could something similar happen in Canada?,” University of Victoria finance professor Michael R. King asked, writing on March 16 in The Conversation, an independent Canadian news source from this country’s academic and research community.

“For the largest Canadian banks, the answer is no,” King wrote. “But for smaller, niche financial service firms, recent history suggests they should not be complacent.”

King points out that niche lenders in the UK and Canada, such as Northern Rock — collapsed in 2007 after a bank run, while Home Capital Group (CA:HCG) almost did before being rescued by Warren Buffett in 2017.

The common denominator with both lenders is that they had niche business models lacking diversified funding. When push came to shove, SVB fell off a cliff.

However, the same day as King’s article, Mark McQueen, a long-time innovation lender, wrote a opinion piece in The Globe and Mail, suggesting that the demise of SVB will leave a gaping hole in startup funding on both sides of the border for years to come. His bona fides include the leadership role at CIBC Innovation Banking until announcing his retirement in February.

“Although there are almost 5,000 banks in North America, only a handful focus on startups, despite the importance of software, biotech and clean technology to the future of our economy, health and environment,” McQueen wrote.

“While traditional commercial banks will only lend against ‘hard assets’ or your personal guarantee, people such as me or SVB’s team have spent decades building the expertise to provide debt capital based on the value of your “enterprise,” taking into account your company’s IP, revenue or both.”

Funding Enough?

So, while Canadians worry whether their bank deposits are safe (they are), we all should be wondering if the Big Five have what it takes to fund innovation in this country.

“With the loss of such a large debt partner, many VC funds will need to reserve more of their own capital to fund each and every new startup. Which means these same VCs will have no choice but to back fewer new firms,” McQueen wrote.

“And fewer new startups means there’s an irrefutable risk that the ‘next Moderna’ won’t get that first round of essential funding. The consequences of this single bank failure are difficult to overstate.”

Still, banks authorized $1.52 trillion in credit to Canadian businesses, as of 2021, according to the Canadian Bankers Association. Of that, $269.1 billion went to small and medium-sized businesses.

The Globe reports that Canada’s big banks are wooing SVB’s Canadian customers to move to their institutions. As a foreign bank branch, Silicon Valley Bank’s Canadian operations could not accept deposits from Canadians or borrow money from financial institutions.

Canadians thump their chests that a concentrated banking sector with five or six firms is a good thing. However, as the lack of competition in the wireless industry here demonstrates — we’re said to have some of the highest cell phone bills on the planet — support from the big banks for innovation and entrepreneurship, especially in the tech sector, is woefully inadequate.

As McQueen politely points out, the loss of SVB will hurt Canadian tech more than people realize, primarily because the Big Five are ill-equipped to step into the breach. It’s against their nature.

This article originally appeared on Fintel

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.