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After Silicon Valley Bank's collapse, what would happen if a Canadian bank failed?

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Following the collapse of Silicon Valley Bank (SVB), experts say the prospect of a bank failure in Canada remains low and highlight the process by which depositors could get their money back.

Trevor Tombe, a professor of economics at the University of Calgary, said in a phone interview on Tuesday that Canada has several agencies which ensure the nation’s banking sector remains stable. He said the main regulating body is the Office of the Superintendent of Financial Institutions (OSFI), which monitors and audits Canada’s main banks.

Other regulating bodies include the Bank of Canada and the Canada Deposit Insurance Corporation (CDIC), which would take over a failing institution if necessary, Tombe said.

“It's important to remember there's a knee-jerk reaction for most Canadians. They look south of the border, and they see something happening and they say ‘it has to happen here as well,’” Laurence Booth, a professor of finance at the University of Toronto, told BNN Bloomberg in a phone interview Wednesday.

In an effort to protect creditors, OSFI announced Wednesday that it is taking over SVB’s Canadian assets indefinitely. The announcement comes after SVB’s collapse, which marked the largest failure of a U.S. lender in a decade. 

DEPOSITOR REPAYMENT

Tombe said that in Canada, the six largest banks are deemed “systemically important,” which means they would be treated differently than a smaller institution in the event of a potential failure.

“Their [big six banks] operations are critical to not just the banking system, but Canada's overall economy, [meaning] that they would not be closed. They would just be taken over and their operations would continue. Smaller banks though, they 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, Tombe said.

“If it's an unregistered account, you're literally sent a cheque. If it's something like an RRSP [Registered Retirement Savings Plan], then that takes a little bit longer and they try and move that account to another financial institution,” he said.

The CDIC is a federal Crown corporation that safeguards over $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 each issued category.

The CDIC said coverage extends to things like savings and chequing accounts, guaranteed investment certificates (GICs) as well as foreign currency. However, the CDIC said it does not cover things like mutual funds, securities and bonds, exchange traded funds (ETFs) or cryptocurrencies.

“So the deposits that are insured is just your first $100,000, but that's per account. So if you want more of your deposits insured, then you can open multiple accounts at a bank, for example,” Tombe said.

“So it's not a limit to you personally, in terms of the total amount that you have at a bank. It's a limit just on an account-by-account basis.”

Booth said that the current specified limit for CDIC protection is more than adequate for Canada’s smaller banks, but if one of the nation's big six banks failed then regulators could potentially protect deposits above the $100,000 per account threshold.

”So there's the law or the regulations and then there's what happens in a particularly desperate situation,” he said.

Booth said the CDCI, Bank of Canada and OSFI all coordinate with each other. He said with approval from the Bank of Canada, OSFI can lend money to “almost any organization.”

“So what would happen is that if one of the big Canadian banks got into serious trouble, I think there'd be a rescue or significant help for one of the other agencies of the federal government apart from CDIC,” Booth said.

“In all probability, even though the normal amount [is] $100,000, there would be some sort of rescue to make sure that deposits greater than $100,000, were secure,” he said adding that there is uncertainty surrounding how the situation would play out.

UNLIKELY EVENT

According to Tombe, a Canadian bank has not collapsed since 1996 and the prospect of a failure remains extremely low today. He said Canada has a high degree of concentration in its banking system and is vastly different from the U.S.

“And so our larger banks are, I don't want to say zero risk, but basically as zero risk as you can get to a failure,” Tombe said.

“If it got to the point where there was really serious concerns, then their operations would simply be taken over by the CDIC, they would not be closed because their operations are so critical.”

The prospect of a bank failure in Canada is “extremely unlikely,” Booth said due to the conservative nature of its banks and regulators.

“The big test for the Canadian banks was the financial crisis in the United States in 2008 and 2009,” Booth said.

Amid the financial crisis of 2008, Booth said there were liquidity concerns regarding Canadian banks only because capital markets “suddenly dried up.”

“But there was never any question about the safety of the Canadian banking system. And since then, the banking systems got even more secure, there's even more requirements to hold liquid reserves and keep capital,” he said.

SVP COLLAPSE

Shilpa Mishra, a partner and managing director in BDO Canada’s capital advisory practice, said in a phone interview Wednesday there are four main factors that lead to the collapse of SVB which highlight the difference between the U.S. and Canadian banking sectors.

Mishra said a “fundamental mismanagement” occurred at SVB, particularly regarding its interest rate risk management.

“So they [SVB] had deposits and these mortgage-backed securities. As interest rates rose, bond prices fell. Basically, they had losses and they could barely cover their liabilities,” she said.

Another contributing factor to the collapse of SVB was that it lobbied the U.S. government to remove regulations over the previous few years, said Mishra.

“So they weren't as heavily regulated. They weren't required to conduct stress testing or review their liquidity coverage ratio,” she said, adding that there was no third-party review of interest rate-related risk.

Additionally, SVB had a very concentrated customer base in the technology industry, Mishra said. 

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