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Why the Silicon Valley Bank failure isn't looking like a repeat of 2008 – CBC News

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The financial institution best known for its relationships with high-flying tech startups and venture capital firms, Silicon Valley Bank, experienced one of the oldest problems in banking — a bank run — which led to its failure on Friday.

Its downfall is the largest failure of a financial institution in the United States since Washington Mutual collapsed at the height of the financial crisis more than a decade ago. And it had immediate effects.

Some startups that had ties to the bank scrambled to pay their workers, and feared they might have to pause projects or lay off employees until they could access their funds.

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California Gov. Gavin Newsom said Saturday that he’s talking with the White House to help “stabilize the situation as quickly as possible, to protect jobs, people’s livelihoods, and the entire innovation ecosystem that has served as a tent pole for our economy.”

How did this happen? Here’s what to know about why the bank failed, who was affected most, and what to know about how it may, and may not affect, the wider banking system in the U.S.

Why it failed

Silicon Valley Bank was hit hard by the downturn in technology stocks over the past year as well as the U.S. Federal Reserve’s aggressive plan to increase interest rates to combat inflation.

A view of the outside of a bank.
Vehicles are parked outside a Silicon Valley Bank branch in Wellesley, Mass., on Saturday. (Peter Morgan/The Associated Press)

The bank bought billions of dollars worth of bonds over the past couple of years, using customers’ deposits as a typical bank would normally operate. These investments are typically safe, but the value of those investments fell because they paid lower interest rates than what a comparable bond would pay if issued in today’s higher interest rate environment.

Typically that’s not an issue, because banks hold onto those for a long time — unless they have to sell them in an emergency.

But Silicon Valley’s customers were largely startups and other tech-centric companies that started needing cash more over the past year. Venture capital funding was drying up, companies were not able to get additional rounds of funding for unprofitable businesses, and therefore had to tap their existing funds — often deposited with Silicon Valley Bank, which sat in the centre of the tech startup universe.

So Silicon Valley customers started withdrawing their deposits. Initially that wasn’t a huge issue, but the withdrawals started requiring the bank to start selling its own assets to meet customer withdrawal requests. Because Silicon Valley customers were largely businesses and the wealthy, they likely were more fearful of a bank failure since their deposits were over $250,000 US, which is the U.S. government-imposed limit on deposit insurance.

That required selling typically safe bonds at a loss, and those losses added up to the point that Silicon Valley Bank became effectively insolvent. The bank tried to raise additional capital through outside investors, but was unable to find them.

The fancy tech-focused bank was brought down by the oldest issue in banking — a run on the bank.

The main entrance to a bank in Menlo Park, Calif.
The entrance to a Silicon Valley Bank in Menlo Park, Calif., is seen on Friday. (Michaela Vatcheva/Reuters)

Bank regulators had to seize Silicon Valley Bank’s assets to protect the assets and deposits remaining at the bank.

San Francisco-based employee performance management company Confirm.com was among the Silicon Valley Bank depositors that rushed to pull their money out before regulators seized the bank.

Co-founder David Murray credits an email from one of Confirm’s venture capital investors, which urged the company to withdraw its funds “immediately,” citing signs of a run on the bank.

Such actions accelerated the flight of cash, which led to the bank’s collapse.

What happens next?

There are two large problems remaining with Silicon Valley Bank. Both could lead to further issues if not resolved quickly.

The most immediate problem is Silicon Valley Bank’s large deposits. The U.S. government insures deposits to $250,000, but anything above that level is considered uninsured. The Federal Deposit Insurance Corporation said insured deposits would be available on Monday morning. However the vast majority of Silicon Valley Bank’s deposits were uninsured, a unique characteristic of the bank due to its customers being largely startups and wealthy tech workers.

People standing outside of a bank.
People stand outside of an entrance to Silicon Valley Bank in Santa Clara, Calif., on Friday. (Jeff Chiu/The Associated Press)

At the moment, all of that money can’t be accessed and likely will have to be released in an orderly process. But many businesses cannot wait weeks to access funds to meet payroll and office expenses.

Tara Fung, co-founder and CEO of tech startup Co:Create, said her firm uses multiple banks besides Silicon Valley Bank and was able switch over its payroll and vendor payments to another bank. 

Her firm chose the bank as a partner because it is the “gold standard for tech firms and banking partnerships,” and she was upset that some people seemed to be gloating about its failure.

A second key problem is there’s no buyer of Silicon Valley Bank. Typically bank regulators look for a stronger bank to take on the assets of a failing bank, but in this case, another bank hasn’t stepped forward.

A bank buying Silicon Valley Bank could go a long way to resolving some of the problems tied with the money that startups can’t access right now.

Any sign of a repeat of 2008?

At the moment, no, and experts don’t expect there to be any issues spreading to the broader banking sector.

Silicon Valley Bank was large but had a unique existence by servicing nearly exclusively the technology world and VC-backed companies. It did a lot of work with the particular part of the economy that was hit hard in the past year.

Other banks are far more diversified across multiple industries, customer bases and geographies. The most recent round of “stress tests” by the Federal Reserve of the largest banks and financial institutions showed that all of them would survive a deep recession and a significant drop in unemployment.

However there might be economic ripple effects in the Bay Area and in the technology startup world if the remaining money can’t be released quickly.

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Windsor-Essex brewers lament impact of looming 6.3% alcohol tax

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Chapter Two Brewing Company in Windsor is celebrating a milestone this weekend.

“Five years! We’re pretty pumped that we got this far and we’re still going strong,” said brewery co-owner and general manager, Cheryl Watson. “It’s good news, I mean, we’ve gone through a lot.”

From the impact of lockdowns during the pandemic to recent inflationary pressures and wage increases, Watson notes the cost of doing business has been steep.

And that anniversary celebration will clouded by a looming alcohol excise tax increase on all alcohol producers.

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“I think everything is just, it’s been unpredictable for suppliers and buyers alike,” Watson said. “We have to look at and figure out what part of it you’re going to cover and what part of it you’re going to ask your customer to cover.”

That question will get harder on April 1 when the 6.3 per cent federal excise tax goes into effect on beer, wine and spirits producers.

Taxes already make up 50 per cent of the cost of beer, 65 per cent of the cost of wine and 75 per cent spirits, according to the Canadian Taxpayers Federation.

“The screws are tightening and we don’t have as many places to play anymore,” said Watson.

The increase on the table is triple the usual jump — a number tied directly to inflation — and has alcohol manufacturers wondering who is going to pick up the tab.

“You’re going to see probably a six to 10 per cent increase on the price of your beer,” said Shane Meloche, the owner of Frank Brewing Company in Windsor. He’s weathered the storm that is the past few years in the hospitality industry and doesn’t want to raise prices but worries this time, he may have no choice.

“We’re here to make money. We’ve got 20 to 30 people that work here. We need to stay in business,” Meloche said. “We want to keep everybody employed. So the only way to do that is to pass along that price to the consumer.”

Restaurants who sell alcohol will also feel the effects. A recent Restaurants Canada survey found about half of Canadian restaurants are operating just at or below profitability levels, noting the tax increase will cost Canada’s food-service industry about $750 million a year.

“Their profit margins are very slim. And then when you have a six per cent increase, it’s slimmer,” said Paul Boots, who along with business partner John Conlon launched Suds Runner just a few months back.

It’s a licensed manufacturing representative retailer for nine different Breweries in Ontario where customers can go online and order flights of beer from them that you can’t get at the LCBO or Beer Store — and they bring it to your door.

They started the venture to support local breweries and give their less popular brews more exposure for customers who can’t make it out to craft breweries as often as they’d like.

They hope the increase doesn’t crush their suppliers, customers, or them.

“It’s important, I think, for people to understand that if the price is going up a little bit, it’s not because they’re making more money,” said Conlon.

“They’re just trying to work, trying to make it work.”

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Shares in Deutsche Bank drop as global banking worries persist – Al Jazeera English

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Tumbling stocks dragged down other major banks across Europe, fuelling fears about a banking sector crisis.

Shares in Deutsche Bank have fallen sharply, dragging down other major European banks and reigniting fears about a widening banking sector crisis.

Germany’s biggest lender dropped more than 14 percent on the Frankfurt Stock Exchange in Friday morning trading before clawing back ground in the afternoon to trade 9.5 percent lower, at 8.43 euros ($9.07) a share.

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Tumbling bank stocks dragged down markets across Europe on Friday with Germany’s Commerzbank down 7.5 percent, France’s Societe Generale off 5.9 percent and Austria’s Raiffaisen down 5.9 percent.

Deutsche Bank is one of 30 banks considered globally significant financial institutions, so international rules require it to hold higher levels of capital reserves because its failure could cause widespread losses.

The long-troubled bank has become the focus of investor concerns after the collapse of three regional US lenders and the Swiss government-brokered takeover of Credit Suisse by rival UBS triggered market turmoil this month.

Olaf Scholz
German Chancellor Olaf Scholz says there is ‘no reason to be concerned’ about the health of Deutsche Bank [Johanna Geron/Reuters]

The cost of insuring the bank’s debt against a risk of defaulting, known as credit default swaps, has surged as investors fret about the banking sector’s health.

Rising costs on insuring debt were a prelude to Credit Suisse‘s rescue by UBS. That hastily arranged takeover on Sunday and jitters about Credit Suisse’s long-running troubles led its shares to tank and customers to pull out their money.

Asked whether Deutsche Bank could be the next Credit Suisse, German Chancellor Olaf Scholz said, “There is no reason to be concerned.”

Scholz expressed confidence in Deutsche Bank, saying it had “modernised and organised the way it works. It’s a very profitable bank.”

Speaking in Brussels after a summit of EU leaders, he also said the European banking system was “stable” with strict rules and regulations.

Deutsche Bank said on Friday that it would redeem $1.5bn in tier 2 bonds early. Such a move is normally aimed at boosting confidence in a bank although its shares plunged regardless.

The bank was hit by a string of problems linked to its attempts before the 2008 global financial crisis to compete with Wall Street investment banking giants.

But it launched a major restructuring, which involved thousands of job cuts and a greater focus on Europe, and has returned to financial health. Last year, it booked its highest annual profit since 2007.

European officials said banks in the European Union’s regulatory system, which does not include Credit Suisse, are resilient and have no direct exposure to the failed California-based Silicon Valley Bank and little to Credit Suisse.

Efforts to strengthen banking regulation in recent years “puts us all in a position to say that European banking supervision and the financial system are robust and stable and that we have resilient capitalisation of European banks”, Scholz said.

European leaders, who played down any risk of a possible banking crisis at their summit on Friday, said the financial system is in good shape because they require broad adherence to tougher requirements to keep ready cash on hand to cover deposits.

International negotiators agreed to those rules after the 2008 financial crisis, triggered by the failure of US investment bank Lehman Brothers. US regulators exempted midsized banks, including Silicon Valley Bank, from those safeguards.

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Restaurants and bars across Canada brace for biggest alcohol tax jump in 40 years

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Canada’s restaurant industry is bracing for the biggest jump in the country’s alcohol excise duty in more than 40 years, spurring warnings the tax hike could force some bars and restaurants out of business.

“Any increase at this very vulnerable time for our industry is just another blow while we’re down,” said Brenda O’Reilly, the owner of multiple restaurants and a brewery in St. John’s, N.L.

“It’s like death by a thousand cuts.”

Bar and eatery operators across Canada have endured lockdowns, labour shortages, supply chain mayhem and soaring costs for everything from payroll to cooking oil. Rising inflation has also softened demand as some consumers stay home to save money.

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“Many of us haven’t recovered from the pandemic and now they want to raise this tax,” she said. “It’s hard to get blood out of a turnip. We’ll see more restaurant closures if this goes ahead.”

The federal beverage alcohol duty is set to increase 6.3 per cent on April 1.

Alcohol excise duties are imposed at the manufacturing level and adjusted annually based on inflation.

While the duty is separate from provincial liquor board fees and sales taxes, it ultimately filters down to higher prices for consumers, said CJ Helie, the president of Beer Canada.

“It’s imposed at the point of production and paid by the manufacturer, which means it’s built into the price of the product and magnified as it goes through the supply chain from the distributor to the retailer,” he said.

The automatic annual tax increase is a long-standing irritant for the beverage industry, but was “digestible” when inflation was around two per cent, Helie said.

But this year’s adjustment is more than triple the usual increase and should be reconsidered given the state of the industry, he said.

“When inflation is through the roof, we need to rethink this automatic formula,” Helie said. “The industry is already in dire straits. Using a rigid formula in a time like this is unacceptable.”

Some brewers may try to absorb the higher cost by delaying investment plans like new hiring but he said there’s only so much they can do before passing the tax hike along.

“They’ll try to recoup what they can through the wholesale price but it could impact demand and end up costing them in lower sales volumes anyway,” Helie said.

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Alcohol excise duty rates are adjusted by law on an annual basis to account for inflation, Adrienne Vaupshas, press secretary of Finance Minister Chrystia Freeland, said in an email.

The increase next month works out to less than a penny on a can of beer, she added.

On a litre of wine, the excise duty rate is increasing to $0.731 from $0.688, or a little over four cents, according to figures provided by the Canada Revenue Agency. For a 750 ml bottle of wine, the increase would be closer to three cents.

But industry group Restaurants Canada said it will cost Canada’s food-service industry about $750 million a year, with the average casual dining restaurant expected to pay an extra $30,000 towards alcohol.

At the retail level, the impact may be more subtle. Though added on top of other price increases, consumers may notice higher prices.

The Liquor Control Board of Ontario said customers may experience a price increase on select products by the end of April if manufacturers pass along the federal excise tax increase.

For example, a 750ml bottle of wine or an imported six-pack of beer may increase by five to 10 cents, while a 750ml spirit of 40 per cent alcohol may increase by 70 cents, the LCBO said in an email.

A spokeswoman for the Nova Scotia Liquor Corp. said beverage alcohol prices are increasing by just over three per cent overall next month.

But these increases are due to a number of factors, including higher excise taxes and the rising cost of raw goods such as bottles, cans, barley, and labels, NSLC spokeswoman Allison Himmelman said in an email.

In British Columbia, a spokesperson for the BC Liquor Distribution Branch said it’s not possible to confirm what level of price increase consumers may or may not see.

“Each liquor supplier will decide whether or not to increase its wholesale price to account for the increase it must pay in excise duty,” Robin Fraser said in an email.

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“Then retailers will make the decision on whether to adjust the prices for consumers for those products,” Fraser said. “It is up to each retailer to determine if, and by how much, to raise its prices.”

Alcohol beverage prices rose 5.7 per cent in February compared with a year before, according to Statistics Canada.

While that’s only slightly higher than the overall inflation rate of 5.2 per cent last month, the tax hike in April along with other increases could see the alcohol inflation rate rise faster than general inflation later this spring.

“Our industry is struggling and we can’t absorb more increases,” said Olivier Bourbeau, vice-president of federal affairs with Restaurants Canada. “Restaurant margins are always thin but right now they’re around two to three per cent.”

A recent Restaurants Canada survey found about half of Canadian licensed restaurants are operating just at or below profitability levels.

This is in part because restaurants are absorbing some of the higher costs due to inflation, Bourbeau said.

Indeed, while grocery prices recorded a 10.6 per cent year-over-year increase in February, restaurant food prices only rose 7.7 per cent, Statistics Canada figures show.

Also, alcohol beverages purchased from stores rose 6.0 per cent in February, while alcoholic beverages served in licensed establishments increased only 4.3 per cent, the agency said.

“Restaurants can’t absorb any more price increases,” Bourbeau said. “But if they pass those costs to customers it could hurt their business.”

“At the end of the day, consumers will only pay so much before they start to cut back.”

 

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