There has been one bank failure and a string of close calls in the headlines lately, including the failure of Silicon Valley Bank and the near-death of Signature Bank and First Republic Bank.
What’s more, Switzerland-based UBS bought its rival Credit Suisse for $3 billion Swiss Francs ($4.4 billion CAD) to prevent a potential global banking crisis. It’s understandable that many Canadians are wondering whether the same thing can happen in this country, and whether their own money is safe.
Thankfully, experts say Canadian banks are significantly less vulnerable to failure than our neighbours’ to the south, for many reasons, and your money in a Canadian bank will continue to be safe.
What Happened to Silicon Valley Bank?
To assess whether Canadian banks are truly among the “safest in the world,” as they were deemed during the 2008 World Economic Forum, or whether they are just as vulnerable to failure as the banks in the U.S., one must first understand why Silicon Valley Bank failed.
Established in 1983, Silicon Valley Bank had a customer base mostly made of tech startups backed by venture capital. It used short-term deposits from these startups to buy mortgage-backed securities and U.S. Treasury bonds. As interest rates began to rise when the Federal Reserve made efforts to quell inflation, the value of these bonds fell to significantly less than what SVB paid for them.
As a result, by the end of 2022, SVB’s assets had lost more than $17 billion USD ($23 billion CAD), and as rates kept rising in 2023, the value of those assets kept falling.
At the same time, SVB’s tech-startup clients were also feeling pressure, because of inflation and those higher interest rates. They needed to manage their increasing costs, and new sources of funding were disappearing, so they withdrew their money from SVB; withdrawals were outpacing deposits. In order to fund their clients’ withdrawals, the bank was forced to sell off the mortgage-backed securities and Treasury bonds it was counting on holding until maturity. The loss SVB had to take on its assets eclipsed the book value of the entire bank.
Specifically, on March 8, SVB told investors that it took a $1.8 billion ($2.46 billion CAD) loss on its $21 billion ($28 billion CAD) portfolio of Treasury securities, and borrowed $15 billion ($20 billion CAD). The majority (94%) of the bank’s deposits exceeded $250,000, and as such they were not insured by the Federal Deposit Insurance Corporation (FDIC). This caused a mass exodus of customers. On March 9, depositors pulled $42 billion ($57 billion CAD) from their accounts with SVB.
With the bank’s bond portfolio value down and its deposits dwindling, SVB couldn’t find a private buyer in time. It was eventually acquired by the FDIC, stopping the bank run but also marking the second largest bank failure in U.S. history.
Are Canadian Banks at Risk of Failing Like Silicon Valley Bank?
The short answer to the above question is no. In Canada, there are only 28 domestic banks (in the U.S. that number is over 7,000). With a more competitive space in the U.S., banks like SVB and others took more chances and took on more risk in an effort to differentiate themselves from their competition and provide more options to their customers.
In fact, economists found that nearly 200 U.S. banks share some of the same circumstances that led to SVB’s downfall, namely a high level of uninsured deposits and a drop in the value of government bonds and mortgage-backed securities they hold, due to the recent rise in interest rates.
According to their paper, the authors concluded that if just 50% of uninsured depositors decided to withdraw, 186 banks (and, hypothetically, $300 billion of uninsured deposits) could be in jeopardy.
In contrast, Canada’s financial system is more concentrated, with six banks (RBC, BMO, TD, Scotiabank, CIBC and National Bank of Canada) controlling 85% of $3.955 trillion in domestic assets. While the Canadian banking landscape is more concentrated, it’s also more diverse. The banks have their fingers in many different financial pies, including brokerage services, wealth management, insurance and deposits and loans, as well as everyday banking services.
The smaller number of banks in Canada also means that banking regulators have an easier time keeping an eye on what they do. They’ve gotten to know the banks’ risk policies and procedures along with their sources of revenue and have put in place stricter capitalization and underwriting standards, which means Canadian banks are much more conservative and do not take as many risks. For example, mortgages are insured by the Canada Mortgage and Housing Corporation (CMHC) when the down payment is less than 20%, and that cost of insurance is passed on to the consumer.
All Canadian banks are federally chartered (there are no provincially chartered banks like the state-chartered ones in the U.S.) and overseen by federal agencies, like the Office of the Superintendent of Financial Institutions (OFSI), which can remove bank CEOs violating regulatory requirements. Also, the assets to capital ratio in Canada is much lower than that of the U.S. (18:1 versus the U.S. norm of 25:1).
The political climate around bank regulation is also different in Canada. Politicians are generally more inclined towards enforcing the rules, and bankers know that they should expect close scrutiny.
The concentrated market also means that six major banks also tend to work in lockstep with each other, changing prices so they are similar within a few weeks of each other. Cooperating on standard-setting like this has reduced entry-level risks and costs.
All of these efforts seem to be working, as there have been zero bank failures in Canada since 2001 compared to 563 in the U.S.
What Would Happen if a Canadian Bank Fails?
All that is to say, it’s not impossible for a Canadian bank to fail, as an economic slowdown after decades of reliance on cheap money means there are likely more bank failures to come around the world. However, experts say that SVB’s failure is unlikely to have an effect on Canada’s big banks.
If a Canadian financial institution did fail, that’s where the Canada Deposit Insurance Corporation (CDIC) would step in. Deposits up to $100,000 (including principal and interest) across seven different categories are insured including:
- Deposits in one name.
- Joint deposits
- Deposits in trust (including RESPs).
- Deposits in TFSAs.
- Deposits in RRSPs.
- Deposits in RRIFs.
- Mortgage tax accounts.
Though the CDIC doesn’t cover everything, another way to keep yourself further protected is to diversify your insurance-eligible assets into several CDIC-insured banks, since you will get a payout up to $100,000 for every eligible account.
In any case, OFSI is also there to supervise federally regulated financial institutions and insurers, so that they likely will never get close to default. Plus, studies show the more people know about the CDIC, the more confident they are in their savings, which contributes to the stability of the Canadian financial system as a whole.
In essence, if you keep your funds in a CDIC-insured institution and don’t exceed $100,000 in account value, your money should be safe— even in the worst case scenario. However, with all that Canadian banking regulators have done and the historical culture in Canada of safety and soundness, it seems unlikely it will ever come to that.