Four days in March: Following SVB collapse, a swift reality check of the Canadian system

To shared

The banking turmoil in the U.S., which soon migrated to Europe but not Canada, began on Friday, March 10. That’s when the U.S. government seized two failed U.S. banks, Silicon Valley Bank (SVB) and Signature Bank. SVB, based in Santa Clara, Calif., was one of the 20 largest banks in the U.S.

When it collapsed, SVB held $173 billion (U.S.) in deposits. That would have made for one of history’s biggest losses of depositors’ money had U.S. regulators not taken control of SVB to protect those funds.

Four days after the SVB collapse, on March 14, Chrystia Freeland, the Canadian finance minister, assured Canadians that “our financial institutions are stable and resilient.”

Freeland’s reassurance followed a swift and thorough reality check of the Canadian system.

Four days in March

When the shocking news of SVB’s failure reached her on Black Friday, Freeland was in the final and most difficult stretch of preparing her annual budget, which she will deliver to Parliament on Tuesday.

Freeland put that work aside to consult with top officials at the Bank of Canada (BoC) and with Peter Routledge, who heads the federal Office of the Superintendent of Financial Institutions (OSFI).

With Routledge and BoC officers present in virtual conference calls, Freeland conferred with the CEOs of Canada’s financial institutions.

And she consulted with all 13 provincial and territorial finance ministers, again in the company of BoC officials and Routledge.

What this process meant for, say, Ontario Finance Minister Peter Bethlenfalvy, is that effectively everyone in positions of high responsibility in Canada’s G7 financial system — CEOs, politicians, regulators — was on the same call.

Painstaking progress

That kind of rapid co-ordination is possible only due to painstaking improvements to the financial system dating from a century ago, with the 1923 collapse of the Toronto-based Home Bank of Canada. The demise of Home Bank, caused by internal criminal malfeasance, is still the biggest financial failure in Canadian history.

That crisis prompted the creation of what is now OSFI, and today’s practice of daily regulatory scrutiny of financial institutions. The 1965 collapse of Atlantic Acceptance Corp. Ltd., a large consumer finance company, marked the launch of federal deposit insurance.

And the 1985 failure of two regional Alberta lenders, Canadian Commercial Bank and Northland Bank, brought in stricter lending limits and higher capital requirements to cushion against losses.

There are just six big Canadian banks that account for more than 85 per cent of Canadian depositors’ money. All major banks in Canada are federally regulated. Canada’s Big Six banks are diversified to protect against weakness in any one line of business. And except for the Quebec-focused National Bank of Canada, they each serve Canadians from coast to coast.

And there are only two principal financial regulators, the BoC and OSFI, who work hand in glove.

If the Canadian banking system had a motto, it might be Mark Twain’s adage: “Put all your eggs in one basket — and then watch that basket.”

The U.S. system is different

There are more than 4,000 member banks of the U.S. Federal Deposit Insurance Corp., none of them truly national. There is a plethora of competing U.S. federal and state banking regulators. And smaller banks are less strictly regulated than large ones, on the theory that smaller banks don’t present a systemic risk.

In such a fragmented system, problems are routinely overlooked.

SVB, a regional bank, nearly tripled its assets between 2019 and 2022, a danger sign that no one caught. And SVB was highly exposed to cryptocurrency, whose plunge in value last year somehow did not cause regulatory alarm over the soundness of crypto-laden banks.

No claim is made here for a superior Canadian system.

Canadian banks took heavy losses on ill-advised Eastern European loans in the 1980s and commercial real estate loans in the early 1990s. Regulatory laxity was a factor in the two Alberta bank failures. And in 2017, Home Capital Group, a Canadian niche mortgage lender to less creditworthy borrowers, required an investor bailout to rescue the firm.

Each of those calamities resulted from a rush by financiers into high-risk territory. But co-ordinated interventions by the BoC, OSFI and the federal Finance Ministry ensured no loss of depositors’ funds. And the Big Six banks, with an occasional nudge from regulators, maintain enough capital to sustain large losses.

But regulatory vigilance is imperative. There will always be financiers with fancy computerized modelling to “prove” that they have drained the risk from their latest plan for spinning straw into gold. That folly was cast in high relief in the Wall Street meltdown that triggered the Great Recession. But it is an ever-present danger.

Legendary financier Felix Rohatyn, who spearheaded New York’s comeback from bankruptcy in the 1970s, had a warning about that.

“I think,” Rohatyn said, that “there are two areas where new ideas are terribly dangerous — economics and sex. By and large, it’s all been tried before, and if it’s new it’s probably illegal or dangerous or unhealthy.”

To shared