SVB collapse: Could bank failures happen in Canada?

The global economy continues to feel the ripple effects after US authorities seized Silicon Valley Bank (SVB) last Friday.

SVB was the 16th largest bank in the United States, primarily serving startups and California’s technology industry. It was the biggest US bank failure since 2008. Regulators also closed New York-based Signature Bank on Sunday.

But in Canada, a bank hasn’t failed in nearly 27 years. While the risk of bank failure in Canada is not zero, many of the circumstances that led to the collapse of SVB do not apply to the Canadian banking sector.

“No bank is immune to a bank run,” Western University’s Christian Bravo, the Canada Chair in Banking and Insurance Analysis, told CTVNews.ca by phone Tuesday. “If everyone goes to the bank and tries to withdraw their money, it will cause a collapse.”

SVB has invested heavily in government bonds and mortgage-backed securities. But when the US Federal Reserve started raising interest rates, those investments slowly began to lose their value.

“Now this is not a new problem in banking and you can insure yourself against this kind of interest rate risk. Obviously SVB didn’t. And so this is as much the fault of the regulators and stress testers as it is the culprit. This is absolutely something that should have been anticipated,” David McDonald, senior economist at the Canadian Center for Policy Alternatives, told CTV News Channel on Tuesday.

SVB, facing a liquidity crunch, announced last Wednesday that it had sold those investments at a loss and had to raise capital to fill a huge hole in its balance sheet.

This caused panic among depositors, resulting in a banking crash. US regulators took control of the bank on Friday.

In the US, banks with assets below US$250 billion are considered small banks and are therefore subject to weaker liquidity requirements. But in Canada, Bravo says a bank “would have to be much smaller” to benefit from lighter regulations.

It Canadian Bankers AssociationAn industry group representing Canada’s banking sector released a statement Monday highlighting stricter liquidity standards in Canada as “a testament to the resilience of Canada’s banking system.”

“Canadian banks are well capitalized with stable capital ratios, have diversified business models and funding sources and must meet strict liquidity standards set by federal regulators,” the association said. “Canada’s banking system is widely recognized for its prudent lending and risk management practices, diligent government oversight and sound regulation based on core principles of safety and soundness.”

Macdonald agrees that what happened to SVB is unlikely to happen in Canada.

“In the Canadian context, you know, we don’t really have this kind of problem. Our banks are just better regulated, frankly. They perform better in stress tests. And so this kind of interest rate risk can reduce bank profits. “It’s certainly possible in Canada, but we’re not in real danger of this type of collapse,” he said.

Another factor, Bravo notes, is that Canada’s banking sector is much more concentrated around the Big Six banks. Smaller financial institutions exist in Canada, but they are usually credit union-like institutions that serve consumers with deposits of $100,000 or less, which is the maximum amount insured by the Canada Deposit Insurance Corporation.

On the other hand, the US has a large number of small and medium-sized regional banks, many of which serve business customers with more than $250,000; 250,000 USD.

“(SVB’s clients) were mostly companies with big money. So it wasn’t a big deal for them to get US$1 billion, US$2 billion, US$3 billion,” Bravo said. “That’s not the case in Canada.”

Despite the fact that these depositors were not insured, US President Joe Biden’s administration announced on Sunday that his country would guarantee all SVB deposits. Canada’s banking regulator, the Office of the Inspector General of Financial Institutions, has also announced it will take over. SVB’s Canadian assets.

With files from the Associated Press.