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After the collapse of Silicon Valley Bank, how likely are bank failures in Canada?


The world economy continues to feel the ripple effects after U.S. authorities took over Silicon Valley Bank (SVB) last Friday.

SVB was the 16th largest bank in the United States, largely catering to startups and the tech industry in California. It was the largest U.S. bank failure since 2008. On Sunday, regulators also closed New York-based Signature Bank.

But in Canada, a bank hasn't collapsed in nearly 27 years. While the risk of bank failure in Canada isn't zero, many of the circumstances that led to the collapse of SVB don't apply in the Canadian banking sector.

"No bank is immune to a bank run," Western University's Cristián Bravo, who is the Canada Research Chair in banking and insurance analytics, told over the phone Tuesday. "If everyone goes to the bank and tries to withdraw their money, that is going to cause a collapse."

SVB had been heavily invested in government bonds and mortgage-backed securities. But as the U.S. Federal Reserve began to raise interest rates, these investments slowly began to lose their value.

"Now, this isn't a new problem in banking and you can insure against this type of interest rate risk. Clearly SVB didn't do that. And so this is as much the fault of regulators and stress-testers as it is of the bank itself. This is absolutely something that should have been foreseen," David Macdonald, senior economist for the Canadian Centre for Policy Alternatives, told CTV News Channel on Tuesday.

SVB, facing a lack of liquidity, announced last Wednesday that it had sold off these investments at a loss and needed to raise capital to fill a massive hole in its balance sheet.

That triggered panic among depositors, resulting in a bank run. On Friday, U.S. regulators took control of the bank.

In the U.S., banks with assets of under US$250 billion are considered small banks and thus subject to looser liquidity requirements. But in Canada, Bravo notes that a bank would "need to be a lot smaller" in order to take advantage of lighter regulations.

The Canadian Bankers Association, the industry group representing the banking sector in Canada, released a statement Monday highlighting the stricter liquidity standards in Canada as a testament to "the resiliency of Canada's banking system."

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

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

"In the Canadian context, you know, we don't really have this type of problem. Our banks are just better regulated, frankly. They're better stress-tested. And so this type of interest rate risk may well decrease banking profits—that's certainly a possibility in Canada—but we're at no real risk of this type of collapse," he said.

Another factor, Bravo points out, is that the banking sector in Canada is much more concentrated around the Big Six banks. Small financial institutions do exist in Canada, but these are typically institutions like credit unions.

The U.S. has a plethora of small- and medium-sized regional banks, many of which serve business clients holding more than US$250,000—the maximum insurable amount in the U.S. More than 97 per cent of SVB's clients had deposits exceeding US$250,000.

"(SVB's clients) were mostly companies with large amounts of money. So, it didn't think much of them to get US$1 billion, US$2 billion, US$3 billion out," Bravo said. "That's not the case in Canada."

Despite the fact that these depositors weren't insured, the U.S. President Joe Biden's administration announced Sunday his country would be guaranteeing all SVB deposits. The Office of the Superintendent of Financial Institutions, Canada's banking regulator, also announced it would be taking control of SVB's Canadian assets.

With files from The Associated Press. Top Stories

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