Another bank is down as financial institutions crack under the pressure of rapid interest rate hikes, but Canada’s highly regulated financial system is in safe hands, experts say.
On Sunday, Switzerland’s largest bank, UBS, bought its rival Credit Suisse for 3 billion Swiss francs ($4.4 billion) in an emergency deal to help stifle a potential banking crisis after the failures of American-based Silicon Valley Bank and Signature Bank, earlier this month.
As global financial markets are shaken by the aftershocks of the failure, some have questions about how safe Canada’s banks are and whether the contagion and panic will negatively impact our largest financial institutions.
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Canada’s top officials maintain the country’s financial system has the strength to weather the banking turmoil.
On Monday, Deputy Prime Minister Chrystia Freeland asserted that Canadian banks are prudent in risk management, which is a “core principle” for those who regulate the financial system.
“We have strong institutions, and we have a financial system that has proven its strength time and again,” Freeland said. “Our financial institutions have the capital they need to weather periods of turbulence.”
Cristián Bravo, Canada Research Chair in banking and insurance analytics at Western University, said a collapse here is highly unlikely, as Canadian banks are heavily regulated.
Canada’s banking sector is highly concentrated with six big banks and a few smaller institutions. The Big Six are stable, profitable and highly regulated with large reserves, and the smaller institutions are so small, if one were to collapse it wouldn’t topple the banking system, he said.
“The definition of a small bank in Canada is actually small,” Bravo said. “Small banks here don’t destabilize the full banking system.”
In the U.S., there are more than 100 mid-sized banks with assets of $250 billion or less that are subject to less stringent liquidity requirements and thus more prone to collapse, Bravo said. But that “isn’t the case in Canada,” he added.
Canadian banks are well capitalized, with enough funds and liquidity to operate effectively, and have a diversified client base, unlike Silicon Valley Bank which focused on the tech sector, said Chayawat Ornthanalai, associate professor of finance at the University of Toronto’s Rotman School of Management.
To help ease the pressure, our central bank, the Bank of Canada — along with several other central banks — announced on Sunday they would allow banks faster access to U.S. dollars if they need them to ensure the banks have enough liquidity to operate.
All eyes are on the U.S., where worries persist at smaller and mid-sized banks that depositors could pull out all their money at once due to fears of collapse — in what’s called a bank run — toppling the whole system, said Ornthanalai.
So far, the bailouts and other measures appear to be boosting investor and consumer confidence, as witnessed in the markets, which showed signs of improvement Monday.
But the markets will remain volatile for the next month or two, experts warn, as the banking system adjusts to the recent shock waves.
“Imagine if RBC tried to absorb TD,” said Bravo. “That would take a lot of time to do and it would impact the market for a bit until they figured it out.”
Credit Suisse’s troubles had been building for years after the bank made a series of bad deals and found itself embroiled in scandals which caused some of its wealthy investors to lose confidence in the bank, said Ornthanalai. Depositors pulled out billions of Swiss francs resulting in the bank experiencing its biggest annual loss since the 2008 financial crisis. Trouble came to a head last week when key shareholder Saudi National Bank refused to help the struggling institution, sending shares to a record low.
The chaos in Europe follows the collapse of Silicon Valley Bank and Signature Bank which became vulnerable to rising rates and troubled cryptocurrencies.
Silicon Valley Bank was heavily invested in government bonds and mortgage-backed securities, but as interest rates began to rise the investments began to lose value.
David Macdonald, senior economist for the Canadian Centre for Policy Alternatives, said the collapse was particularly nasty because many clients has no deposit insurance to protect against losses.
“Banks take in short term deposits and convert them into long term assets, and SVB’s entire deposit base wasn’t insured,” he said.
In the U.S. the maximum insurable amount is $250,000 per account. More than 97 per cent of SVB’s clients had deposits exceeding that amount. “SVB had an extremely high uninsured margin,” Ornthanalai said.
The U.S. federal government swiftly stepped in to make sure all depositors with SVB and Signature Bank were repaid in full. Still, investors in the banks’ stock will lose their money and the banks are closed.
Bravo said that more bank collapses are unlikely now that central banks have ensured financial institutions will have access to enough money to operate.
But Macdonald says he thinks bank failures could continue for some time in the U.S., because the small and mid-sized banks aren’t heavily regulated. And that will have direct repercussions on Canada’s economy.
“We’ll see it play out in forced mergers and takeovers with larger banks purchasing smaller banks,” he said. “It will impact consumer and business spending, as concerns mount about the basic functioning of the economy.”
What’s of bigger concern for Canada is if more bank failures trigger a deeper recession in the U.S. as consumers spend less — becoming overly anxious about the stability of the banking system, Macdonald said.
Canada typically follows the U.S. into a recession as the Canadian economy heavily relies on its southern neighbour.
“That’s a real concern for Canada,” he said.
With files from Associated Press and The Canadian Press.
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