SVB: What would happen if a bank in Canada failed?
After the collapse of Silicon Valley Bank (SVB), experts say the prospect of a bank failure in Canada remains low and are emphasizing the process by which depositors can get their money back.
Trevor Tomb, an economics professor at the University of Calgary, said in a telephone interview Tuesday that Canada has several agencies that ensure the stability of the country’s banking sector. He said the primary regulator is the Office of the Superintendent of Financial Institutions (OSFI), which oversees and audits Canada’s major banks.
Other regulators include the Bank of Canada and the Canadian Deposit Insurance Corporation (CDIC), which would take over a failed institution if necessary, Tomb said.
“It’s important to remember that the majority of Canadians have a concussion. They look south of the border, and they see something happening, and they say, “it has to happen here, too,” Lawrence Booth, a finance professor at the University of Toronto, told BNN Bloomberg in a phone interview on Wednesday.
To protect creditors, OSFI announced Wednesday that it takes over SVB’s Canadian assets indefinitely. The announcement comes after the collapse of SVB, which marked the biggest failure of a US lender in a decade.
BATTLE OF THE DEPOSIT
Tomb said the six largest banks in Canada are considered “systemically important,” meaning they would be treated differently than smaller institutions in the event of a potential failure.
“Them [big six banks] Operations are important not only to the banking system, but also to the overall Canadian economy. [meaning] so that they are not closed. They would simply be taken away and their activities would continue. However, smaller banks can be closed,” he said.
In the event of a Canadian bank failure, depositors would be reimbursed up to $100,000 per account through an automatic process undertaken by the CDIC, Tomb said.
“If it’s a non-registered account, they literally send you a check. If it’s something like an RRSP [Registered Retirement Savings Plan]then it takes a little longer and they try to move that account to another financial institution,” he said.
CDIC is a federal Crown corporation that protects more than $1 trillion in Canadian deposits, according to its website. The regulator said it protects deposits held at member institutions up to a maximum of $100,000 per category issued.
CDIC says coverage extends to things like savings and checking accounts, guaranteed investment certificates (GICs), as well as foreign exchange. However, the CDIC said it does not include things like mutual funds, stocks and bonds, exchange-traded funds (ETFs) or cryptocurrencies.
“So the deposits that are insured are only your first $100,000, but that’s per account. So, if you want your deposits to be more insured, you can, for example, open several bank accounts,” said Tomb.
“So it’s not a limit for you personally in terms of the total amount you have in the bank. It only restricts it on an account-by-account basis.”
Booth said the CDIC’s current protection limit is more than adequate for Canada’s smaller banks, but if one of the country’s big six banks fails, regulators can protect deposits above the $100,000 per account threshold.
“So there’s the law or the regulation, and then there’s what happens in a particularly desperate situation,” he said.
Booth said CDCI, the Bank of Canada and OSFI are all coordinating with each other. With Bank of Canada approval, OSFI can lend to “almost any organization,” he said.
“So what’s going to happen is if one of the big Canadian banks gets into serious trouble, I think there’s going to be a bailout or a significant bailout for one of the other agencies of the federal government, other than the CDIC,” Booth said.
“Most likely, though to a normal extent [is] $100,000, there would be some bailout to make sure deposits above $100,000 are safe,” he said, adding that there was uncertainty as to how the situation would play out.
According to Tombs, a Canadian bank has not failed since 1996, and the prospect of failure today remains extremely low. He said Canada has a high degree of centralization in its banking system and is significantly different from the US
“And so our larger banks, I don’t want to say zero risk, but basically as zero risk as you can get to failure,” Tomb said.
“If it got to the point where there were really serious concerns, their operations would simply be taken over by the CDIC, they wouldn’t be shut down because their operations are so important.”
The prospect of a bank failure in Canada is “extremely unlikely,” Booth said, because of the conservative nature of its banks and regulators.
“The big test for Canadian banks was the US financial crisis in 2008 and 2009,” Booth said.
In the wake of the 2008 financial crisis, Booth said there were liquidity concerns about Canadian banks only because the capital markets “suddenly dried up.”
“But there was never a question about the safety of Canada’s banking system. And since then, banking systems have become even more secure, there are more requirements to hold liquid reserves and hold capital,” he said.
Shilpa Mishra, partner and managing director of BDO Canada’s capital advisory practice, said in a phone interview Wednesday that there are four main factors driving SVB’s collapse that highlight the difference between the U.S. and Canadian banking sectors.
Mishra said there had been “fundamental mismanagement” at SVB, particularly in relation to the management of interest rate risk.
“So they [SVB] had deposits and these mortgage-backed securities. As interest rates have risen, bond prices have fallen. “Mostly, they had losses and were barely able to cover their obligations,” he said.
Another factor contributing to SVB’s collapse was that it lobbied the US government to remove regulations over the previous few years, Mishra said.
“So they weren’t very tightly regulated. They were not required to conduct stress testing or review the liquidity coverage ratio,” he said, adding that there was no third-party review of interest rate risk.
In addition, SVB had a very concentrated client base in the technology sector, Mishra said.
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