State-chartered bank's failure was the largest in the US since the 2008 financial crisis
The Canadian financial system is in a much more robust position that is unlikely to be affected by Silicon Valley Bank’s failure in any meaningful way, according to veteran economist Sherry Cooper.
The state-chartered bank’s collapse on March 10 represented the largest failure of a US-based financial institution since the 2008 financial crisis, and the second largest ever in US history.
Fortunately, Canada’s regulatory environment is “far tighter” than that in the US, Cooper argued.
“Canadian banks are dominated by the Big Six rather than the thousands of banks in the US,” Cooper said. “They have nationwide branch networks with a large diversified base of clients with less exposure to technology, fewer deposit runoff issues, and higher ratios of loans to deposits.”
Additionally, SVB’s Canadian arm, which has been taken over by the Office of the Superintendent of Financial Institutions on March 12, has a license to lend but cannot take deposits.
“While some Canadian startups had deposited with the bank’s US arm, the Canadian operation held no client money,” Cooper said. “SVB is a small lender in Canada.”
However, Gerard Cassidy of RBC Capital Markets stressed that the context surrounding SVB and the 48 hours that led to the institution’s collapse should serve as warnings of what could happen in a very rapid rate hike environment – like the one seen in Canada over the past year.
SVB was “long duration on assets, funding it with short duration funding,” Cassidy said in an interview with BNN Bloomberg, noting that this was an unhealthy combination in the context of rising interest rates.
“This reminds me of 1994 when you saw Orange County, California go bankrupt in the same environment, Mexico had the peso crisis, Kidder, Peabody & Company went under; and so we’ve had periods of time when rates move rapidly as they did in ‘94 under [U.S. Federal Reserve] Chairman [Alan] Greenspan,” Cassidy said.
“You’re going to have consequences [when rates rise quickly] and I was surprised the consequences took so long to it, but boy did it hit on Friday.”