The collapse of Credit Suisse in Switzerland and the Silicon Valley Bank in the United States is giving people financial jitters. You might be wondering – is my money safe in a Canadian bank?
Financial experts have been asking the same thing. And the answer seems to be yes – for the most part.
It’s helpful to understand what pushed these two big banks to the edge. Poor risk management and sloppy oversight are to blame.
Silicon Valley Bank used short-term cash deposits from tech clients to buy longer maturity U.S. mortgage bonds. It was a risky gamble – profitable in good times, disastrous in bad.
When interest rates rose over the past year, Silicon Valley Bank bonds lost $2 billion in value. The bank tried to raise equity to bolster the balance sheet. It failed.
News spread and so did panic, leading to a rapid withdrawal of deposits. Silicon Valley Bank’s cash reserves were quickly drained.
The bank was finished but the US government swooped in to protect its customers.
On the other side of the Atlantic, Credit Suisse was also pushed into a corner when customers rushed to make withdrawals, shareholders dumped stock, and creditors demanded repayment.
The thing is Credit Suisse already had all kinds of problems. It had suffered huge losses from risky hedge fund bets. The Swiss banking giant also faced big fines for failing to prevent money laundering by a Bulgarian drug ring and not reporting secret offshore accounts that wealthy Americans used to avoid paying taxes. In other words, Credit Suisse executives knowingly put customers at risk with shady practices. Customers were saved only after USB, the one rival Swiss Bank, bought Credit Suisse.
Could similar bank runs happen in Canada? The answer for our largest banks is likely not.
Canada’s big five – Royal Bank, TD Bank, Scotiabank, the Bank of Montreal and CIBC – may not be the most cuddly, customer friendly institutions. However, they are considered among the safest in the world.
According to Trevor Tombe, a University of Calgary economist, a Canadian bank hasn’t collapsed since 1996. In an interview for Bloomberg, he said the prospect of a failure remains extremely low today because Canada’s banking system is highly concentrated and relatively conservative.
“And so, our larger banks are, I don’t want to say zero risk, but basically as zero risk as you can get to a failure,” Tombe said. “If it got to the point where there was really serious concerns, then their operations would simply be taken over by the CDIC [Canada Deposit Insurance Corporation,] they would not be closed because their operations are so critical.”
Silicon Valley Bank was a niche, innovative banker and that comes with big risk. In 2017, Canada had a partial bank run in 2017 when Home Capital Group, a niche lender of uninsured mortgages, lost the confidence of its depositors. Its risky business model was based on funding mortgages with high-interest savings accounts and other deposits.
But that’s rare in Canada. Our big banks are diversified. They’re also well capitalized, meaning they hold enough cash in reserve to cover short and long-term obligations.
According to one expert analysis, trust in banking is built on three pillars: risk management, deposit insurance and banking supervision.
Pillar-one is the fact that Canada’s banks have demonstrated solid risk management over many decades, most recently during the global financial crisis.
Pillar-two is the fact that eligible deposits in Canada are insured by the CDIC up to $100,000 per account held at member institutions. If a bank collapses, you’ll get a cheque from CDIC.
Pillar-three is the fact that federal financial institutions are supervised by the Office of the Superintendent of Financial Institutions, which monitors capital levels and risk taking.
So, here’s the upshot. Canada isn’t entirely immune from banking turmoil, but there’s good reason to feel safe about your bank deposits.