Few risks in Canada after the collapse of the Silicon Valley Bank

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Few risks in Canada after the collapse of the Silicon Valley Bank

Silicon Valley Bank customers wait outside the offices of the bankrupt financial institution in California.

As regulators struggle to juggle the sudden collapse of Silicon Valley Bank, analysts say the risk of fallout for the Canadian financial sector is limited.

Not only should the failure of [Silicon Valley Bank] not have significant negative consequences for our banks, but this crisis should in fact be seen as further vindication of the Canadian banking model, argued on Monday. ;Scotiabank analyst Meny Grauman in a note to clients highlighting the stability of Canada's large diversified banks.

U.S. regulators shut down the California bank on Friday, after a bank run that saw its depositors, concerned about its solvency, rush to withdraw their money at the same time.

During the over the weekend, US authorities announced measures to protect the financial system, including ensuring that all bank deposits would be honored. They promised the same for Signature Bank, which was forced to close on Sunday by regulators.

In Canada, the Superintendent of Financial Institutions announced on Sunday evening that it had taken control of the assets of the Canadian branch of Silicon Valley Bank, while insisting on the limited nature of the crisis and the fact that the bank did not hold any commercial deposits. or individual in Canada.

This situation is the result of circumstances that are unique to the bank in the United States, said the Superintendent of Financial Institutions, Peter Routledge, in a press release.

Silicon Valley Bank was heavily focused on lending to emerging tech and biotech companies, which saw massive growth in the first two years of the pandemic before the sector pulled back. Tens of thousands of tech workers have been laid off in recent months, at companies large and small, amid the downturn.

In addition, the bank's investment portfolio was overly reliant on long-term fixed-rate bonds, which fell in value as interest rates rose. That scenario isn't really a concern for Canadian banks, Grauman said. The reality is that the largest US banks and the Canadian and [Latin American] banks we cover have much smaller securities assets on a relative basis.

Canadian banks also have much less exposure to the tech sector, said National Bank analyst Gabriel Dechaine, pointing out that financial disclosures from banks that break down this sector in their reports have a 1% exposure to the tech sector. 3% in their loan books.

He added, however, that any broader spillover into the California market from Silicon Valley Bank could put Bank of Montreal at greater risk, given its recent acquisition of Bank of the West. Royal Bank of Canada has also had a presence in the state since its acquisition of City National in 2015.

It is unclear how the crisis will affect the Group's impending acquisition TD Bank from US bank First Horizon, but it could allow TD to negotiate better terms, Dechaine said.

The collapse of Silicon Valley Bank , the largest bank failure in U.S. history after Washington Mutual in 2008, also dented the stock prices of many other financial institutions.

These include The Charles Schwab Corporation, which is down more than 30% since last Wednesday, in which TD Bank has a 12% stake. Dechaine noted that every 10% drop in Schwab's share price translates to a $1.8 billion decline in TD's stake in the company.

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