The Silicon Valley Bank Failure: Why Banks Don’t Fail In Canada Like In The U.S. (2024)

Table of Contents

  • What Happened to Silicon Valley Bank?
  • Are Canadian Banks at Risk of Failing Like Silicon Valley Bank?
  • What Would Happen if a Canadian Bank Fails?

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 circ*mstances 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.

The Silicon Valley Bank Failure: Why Banks Don’t Fail In Canada Like In The U.S. (2024)


Does Silicon Valley Bank collapse affect Canada? ›

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.

Why exactly did Silicon Valley Bank fail? ›

Why did it collapse? The collapse happened for multiple reasons, including a lack of diversification and a classic bank run, where many customers withdrew their deposits simultaneously due to fears of the bank's solvency. Many of SVB's depositors were startup companies.

Why are Canadian banks safer than US banks? ›

The only difference is that the Canadian banks have a larger share of loans. This is one of the main factors that makes them safer than American banks, even the larger ones. The Canadian financial system and the American financial system aren't really that different.

What happens when a bank fails in Canada? ›

If a bank does fail, CDIC has tools to resolve them while protecting depositors and contributing to the stability of the financial system. Resolution is the process by which financial institutions that are failing or likely to fail are restructured or closed.

Will US banks collapse affect Canada? ›

TORONTO, March 20 (Reuters) - Canada's top six lenders have ample liquidity and manageable credit risks which will help them to emerge largely unscathed from the crisis of confidence that has rocked the global banks over the last two weeks, analysts said on Monday.

How does the Silicon Valley Bank affect Canada? ›

In Canada, the Office of the Superintendent of Financial Institutions took permanent control of Silicon Valley Bank's Canadian assets to protect creditors, but since the bank does not have a banking licence, this is more of a market-calming measure rather than any specific local liquidity concerns.

When did Silicon Valley Bank fail? ›

On March 10, 2023, Silicon Valley Bank (SVB) failed after a bank run, marking the third-largest bank failure in United States history and the largest since the 2007–2008 financial crisis. It was one of three bank failures, along with Silvergate Bank and Signature Bank, in March 2023 in the United States.

Was Silicon Valley Bank too big to fail? ›

Most significant, the nation learned over the weekend that Silicon Valley Bank, the 16th largest depository institution in the United States, was deemed by the government to be too big to fail — at least in the sense that the normal rules for allocating losses were set aside.

What causes banks to fail? ›

Banks can fail for a variety of reasons including undercapitalization, liquidity, safety and soundness, and fraud. The chartering agency has the authority to terminate the bank's charter and appoint the FDIC to resolve the failure.

Which bank is safest in Canada? ›

Toronto-Dominion Bank (TSX:TD) is the “safest” Canadian bank going by capitalization. Today, it has a 16.2% common equity tier-one (CET1) ratio. The CET1 ratio is cash plus equity divided by all risk-weighted assets. It means that TD's high-quality, low-risk assets are high as a percentage of total assets.

Are Canadian banks like US banks? ›

One key differentiator is that while the U.S. system consists of thousands of mostly regional banks, Canada's national banking system is dominated by six very large institutions—Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal, Canadian Imperial Bank of Commerce, Bank of Nova Scotia, and National Bank of ...

Is it worth having a US bank account in Canada? ›

If you've ever tried to conduct financial transactions across the border, you know that trying to transact in a foreign currency can incur high foreign transaction and conversion fees. Exchange rates are unpredictable as well. This is where having a U.S. dollar bank account is especially handy.

Why Canada's banks remain stable? ›

Collectively, the Big Six banks hold 90 percent of Canada's deposits, providing them with a steady stream of relatively low-cost money to lend out or invest. That dominance also means that Canadians shopping around find little difference in fees or interest rates. Strong revenue from these fees and interest, Mr.

Are banks failing in Canada? ›

Although bank failures are rare in Canada, CDIC is there to protect deposits at its member institutions, big or small. In the case of larger members, CDIC has plans to ensure that all of us would have ongoing access to our deposits and day-to-day banking services. But some things are not protected by CDIC.

Can banks seize your money if economy fails? ›

Banking regulation has changed over the last 100 years to provide more protection to consumers. You can keep money in a bank account during a recession and it will be safe through FDIC and NCUA deposit insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.

How safe is the Canadian banking system? ›

Conclusion. Keeping your money in a CDIC-insured bank and not going over $100,000 in account value protects your money. The Canadian banking system is so well-regulated that bank failure is unlikely. The assurance of a CDIC-insured bank can free you to find the right account for your financial needs.

How will Silicon Valley Bank collapse affect other banks? ›

Banks affected were First Republic Bank, PacWest Bancorp, Regions Financial and Zions Bancorporation. Even shares of big banks lost ground in the aftermath of the SVB and Signature collapses, including Wells Fargo, JPMorgan Chase and Citigroup.

Who all is affected by Silicon Valley Bank? ›

Which companies are affected by Silicon Valley Bank collapse?
  • NORTH AMERICA. Companies in the United States disclosed around $5 billion in deposits, besides various credit facilities, with the bank.
  • ROBLOX. ...
  • ROKU. ...
  • BUZZFEED. ...
Mar 15, 2023

Does the Silicon Valley Bank collapse affect me? ›

Impact on Depositors and Investors

The FDIC insures bank deposits of up to $250,000 per depositor per bank for each account category. 21 In other words, if you had $250,000 in a Silicon Valley Bank account, you would get all of your money back.

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