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The Collapse of Silicon Valley Bank & Are Canadian Banks at Risk? Thumbnail

The Collapse of Silicon Valley Bank & Are Canadian Banks at Risk?

Silicon Valley Bank (SVB) hit headlines late last week when it was announced the bank which catered to niche market funding tech start-up companies had collapsed. The largest bank failure in the U.S. since 2008 (and one of the largest in US history). As is often the case with financial related news, the details can be very complicated leaving you thinking, “How does this happen, is this something that we should worry about, and/or what does this mean for us Canadians?”. Let us answer some of those questions for you.

In short, Silicon Valley Bank, a major lender for startups most familiar to people who work in venture capital and technology, was shut down and taken over by regulators last week. 

The Pandemic Influence: Flush with Cash and Investments

During the pandemic, SVB had become flush with cash and much of those deposits were used to buy investments typically considered safe, like Treasury bonds.

Those investments dropped in value amid the Federal Reserve’s interest rate hikes. With the combination of that type of decline in value, and depositors attempting to pull out their money as funding for startups, the bank had to sell its investments at a loss to cover the withdrawal demands of depositors.

That led to fear, of course causing an influx of even more withdrawal demands as people started to panic about the safety of their cash positions which created the perfect storm and triggered the collapse. Then, on Sunday, regulators shut down Signature Bank as fear spread.

Limited Impact on Canadian Big Six Banks

Despite investor jitters, concerns for the Canadian Big Six are limited. The top 5 banks in Canada are also some of the largest banks in the world. Canada’s big banks dominate their home market and are diversified across industries and business lines.

“From a Canadian perspective, not only should the failure of SVB not have significant negative implications for our banks, but this crisis should actually be viewed as further vindication of the Canadian banking model, which is dominated by a few large and diversified players,” Bank of Nova Scotia analyst Meny Grauman said in a March 13 note. (Financial Post 2023)

Stringent Regulations and Oversight in Canada

While the risk of bank failure in Canada isn't zero, many of the circumstances that led to the collapse of SVB simply does not apply in the Canadian banking sector due to OFSI’s (Office of the Superintendent of Financial Institutions) strict regulations and scrupulous oversight.

In the U.S., banks with assets of under US$250 billion are considered small banks and thus subject to looser liquidity requirements. In Canada, a bank would need to be a lot smaller in order to take advantage of lighter regulations. Canada, along with most of its sectors tends to be the more stringent country when it comes to rules and regulations, specifically in the financial and banking sector. Our banks are heavily regulated and undergo vigorous stress tests. This type of interest rate risk may very well decrease the banks profits—that's certainly a possibility in Canada—but the risk of this type of collapse is non concerning.

Conclusion: Canadian Banks Remain Strong and Stable

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." (Financial Post 2023)

We hope this provides some clarity to those of you who are left scratching your heads this week, or worse – worried what this might mean for you.