Analysis | Is Canada invulnerable to bank failures?

Bank failures since 2001: United States 563, Canada 0.

Faced with the crisis that is shaking the American banking system, financial institutions in Canada are more resilient and less vulnerable than those in the United States, according to experts. (File photo)

After the collapse of Silicon Valley Bank, Signature Bank and Credit Suisse, among others, should we fear an effect of contagion? If a bank failure occurred in Canada, what would happen to your money?

These questions seem to be on everyone's lips lately. Google searches for bank failures have skyrocketed in recent weeks.

Many Canadians are searching online and in their bank branches for answers on how to protect their money. This is the case of Juan Pinilla, who has a savings and investment account with two major Canadian banks.

“I have often wondered: will my deposits and investments survive all this turmoil?

—Juan Pinilla, client of two Canadian banks

The airline pilot, who lives in Toronto and Thunder Bay, in northwestern Ontario , fears that the turmoil in the US banking sector will spill over to this side of the border.

It's worrying for us Canadians, because what is happening in United States affects the entire planet, he says.

Juan Pinilla recently sought to better understand whether the money in his bank accounts is protected, in the aftermath of the crisis at Silicon Valley Bank and a few other financial institutions.

Many people do fear a domino effect, like the one that led to the 2008 financial crisis.

If depositors panic and rush to withdraw their money because they fear that their bank might go bankrupt, this rush can put the financial institution in a very bad position.< /p>

If everyone shows up at the bank, all of a sudden, to withdraw their deposits, the bank doesn't necessarily have the cashor cash in his drawer, says economist Steve Ambler, a monetary policy fellow at the C.D. Howe Institute.

That's what happened in the case of Silicon Valley Bank: its customers, mostly tech start-ups and venture capital firms, have demanded their money in droves, which the bank had invested in long-term bonds.

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As interest rates soared over the past year, the value of these bonds has fallen, says Ambler. To obtain cash, the institution had to sell these bonds, thus crystallizing the large losses in value on these securities.

“The problem is that the panic can spread to other banks as well.

—Steve Ambler, Economist and Monetary Policy Researcher, C.D. Howe Institute

So far it's been relatively contained in the United States. So far, in Canada, that hasn't been a problem, says the economist.

Silicon Valley Bank declared bankruptcy earlier this month, after selling high-loss bonds to meet the requests withdrawals from depositors.

In Canada, the banking system is governed by strict standards. In particular, your bank must ensure that it has enough cash in its vaults to meet the needs of its customers.

In the highly unlikely event that your bank becomes insolvent, you most likely won't lose your money. The Canada Deposit Insurance Corporation protects your savings up to $100,000 per member institution and per deposit insurance category.

This amount, which was established in 2005, should be revised upwards to take inflation into account, economists say.

That $100,000 isn't really much for a lot of people in Canada. Many people have deposited sums that exceed this limit in a single bank, says Brett House, an economics professor at Columbia Business School in New York.

Categories deposit insurance :

• Deposits in the name of one person

• Joint deposits

• Registered Retirement Savings Plan (RRSP) deposits

• Registered Retirement Income Fund (RRIF) Deposits

• Tax-Free Savings Account Deposits (TFSA)

• Registered Education Savings Plan (RESP) deposits

• Registered Disability Savings Plan (RDSP) Deposits

• Trust Deposits

• Deposits in a TFSA for the purchase of a first property (effective April 1, 2023)

The former Scotiabank economist maintains, however, that all the measures put in place in Canada seem to be bearing fruit. Since 2001, there have been no bank failures in Canada, compared to 563 in the United States.

Federal Finance Minister Chrystia Freeland agrees. We have a financial system that has proven its resilience time and time again, she said at a press briefing in Oshawa, Ont., last week.

She adds that our financial institutions are prudent in their risk management and that they have the necessary capital to weather this storm.

The U.S. Federal Deposit Insurance Corporation records 563 bank failures in that country over the past two decades, while there have been none in Canada.

Economist Brett House adds that the Canadian banking system is more concentrated with six major banks – Royal Bank, TD Bank, Bank of Montreal, Scotiabank, National Bank and CIBC – owning 85% of the approximately 4,000 billions of dollars in assets in the country.

These institutions operate in many different industries, including mortgage brokerage services, wealth management, insurance, deposits and loans, and day-to-day banking.

One of the things that makes the banking system in Canada stronger than in the United States is the fact that the six major banking institutions in Canada have a much more diverse pool of depositors, explains Mr. House.

Silicon Valley Bank's customer base, on the other hand, was much more homogeneous, concentrated in the technology, life sciences and venture capital sectors, sectors that are faltering after experiencing strong growth. pandemic.

Brett House, former Deputy Chief Economist at Scotiabank, believes that the Canadian banking system has stronger backbone than that of the United States.

These customers therefore needed liquidity, at the same time, which contributed to this somewhat self-fulfilling bank run, says the economist.

It is unlikely in Canada to see the same situation, he believes.