It’s understandable that recent news of bank failures in the U.S. may be making you nervous. Could failures happen here? The good news is banking failures are extremely rare in Canada and customers are protected.
What happened to Banks in the US?
The biggest US bank failure since the global financial crisis unfolded in real time on March 10 as a major tech industry lender, Silicon Valley Bank (SVB) succumbed to a bank run.
In the aftermath of the collapse, customers frantically began withdrawing their money from the California-based lender. However, the collapse panicked markets, causing further pain to weaker institutions already struggling with soaring interest rates and self-inflicted wounds.
A week later, the United States’ second regional bank, Signature Bank, closed, and a third bank, First Republic Bank (FRC) was bailed out by the Federal Deposit Insurance Corporation (FDIC). These measures were taken to avert the first major threat to a bank of global financial significance since 2008.
Relative calm has returned in the US banking industry now thanks to significant emergency funding from last resort lenders like central banks and other large players in the industry.
What is a Bank Run?
A bank run occurs when many customers of a bank withdraw their deposits at the same time, usually because they have lost confidence in the bank's ability to meet its obligations.
This can be triggered by a variety of factors, such as:
- Rumors of insolvency
- News of large losses or scandals involving the bank
- A general economic downturn.
When a bank experiences a run, it can quickly collapse because it may not have enough cash on hand to meet all the withdrawal requests. This can lead to a cascade of failures as other customers become fearful and rush to withdraw their money as well, which in turn puts more pressure on the bank's liquidity.
Bank runs can have serious consequences for the wider economy, as they can lead to the collapse of the affected bank and the loss of people's savings. They can also cause a domino effect on other financial institutions, triggering a wider financial crisis.
In response, governments and central banks may intervene to try to prevent or contain bank runs, by providing emergency funding, guaranteeing deposits, or implementing other measures to restore confidence in the banking system.
A bank run is unlikely to occur in Canada for the following reasons:
- Strong banking system: Canada has a highly regulated and stable banking system that is considered one of the soundest in the world. The country's major banks are well-capitalized and have a strong credit rating, which means that they are better equipped to withstand economic shocks and other challenges.
- Deposit insurance: The Canadian government provides deposit insurance through the Canada Deposit Insurance Corporation (CDIC)Opens a new website in a new window, which guarantees eligible deposits up to $100,000 per depositor per insured category. This lets customers know that their deposits are protected in the event of a bank failure, reducing the likelihood of a panic-induced run.
- Central bank support: The Bank of Canada plays a key role in maintaining financial stability and has the power to act as a lender of last resort to help banks access liquidity during times of stress. This helps to prevent a liquidity crunch that could trigger a bank run.
- Stringent regulations: Canada has a strong regulatory framework that requires banks to maintain high levels of capital and liquidity. This helps to ensure that banks can absorb losses and continue to operate even in difficult economic conditions.
How do these US banking failures affect Canadians?
The U.S. banking failures that have recently occurred could likely have some indirect and limited effect to Canadians.
Firstly, it's important to note that SVB is a US-based bank that primarily serves the technology and innovation sector. It’s not a domestic bank in Canada and does not have any branches or operations in the country. However, some Canadian technology companies that do business with SVB could be affected if the bank were to collapse.
For example, Canadian startups and tech firms that rely on SVB for financing, payment processing, or other financial services could experience disruptions or delays if the bank were to fail. This could in turn impact their ability to access funding or grow their business, which could have wider implications for the Canadian tech industry.
In addition, a collapse of SVB could also have broader ripple effects on the global financial system, which could impact the Canadian economy.
If SVB were to default on its debts or trigger a wider financial crisis, this could lead to a tightening of credit conditions and a slowdown in economic activity. This could in turn affect Canadian businesses and investors who have exposure to the U.S. financial markets.
How are Canadian deposits and investments protected?
- Canada Deposit Insurance Corporation (CDIC): The CDIC is a federal Crown corporation that provides deposit insurance to protect eligible deposits held at member financial institutions in case of their failure. The CDIC provides coverage of up to $100,000 per insured category, per institution. This means that if your bank or credit union fails, your eligible deposits will be covered up to this amount.
- For example, since it was established by Parlament in 1967Opens a new website in a new window, there have been 43 financial institution failures, affecting more than 2 million depositors. These were stressful times, but nobody lost a single insured dollar.
- Investor protection funds: The securities industry in Canada is regulated by the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA). Both organizations have established investor protection funds to compensate clients of member firms in case of their insolvency. These funds provide coverage of up to $1 million per account, including up to $1 million for cash balances.
- Provincial deposit insurance: Some provinces also have their own deposit insurance programs. For example, Quebec's Autorité des marchés financiers (AMF)Opens a new website in a new window provides deposit insurance for eligible deposits held at Quebec-based financial institutions up to a maximum of $100,000 per depositor per institution. Other provincial deposit insurance programs include:
- Alberta - Alberta Credit Union Deposit Guarantee CorporationOpens a new website in a new window
- British Columbia - Credit Union Deposit Insurance Corporation of B.C.Opens a new website in a new window
- Manitoba - Credit Union Deposit Guarantee CorporationOpens a new website in a new window
- New Brunswick - New Brunswick Credit Union Deposit Insurance CorporationOpens a new website in a new window
- Newfoundland - Newfoundland and Labrador Credit Union Deposit Guarantee CorporationOpens a new website in a new window
- Nova Scotia - Nova Scotia Credit Union Deposit Insurance CorporationOpens a new website in a new window
- Ontario - Financial Services Regulatory Authority of OntarioOpens a new website in a new window
- Prince Edward Island - Credit Union Deposit Insurance CorporationOpens a new website in a new window
- Saskatchewan - Saskatchewan Credit Union Deposit Guarantee CorporationOpens a new website in a new window
- Registered accounts: Certain types of registered accounts, such as Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), are also protected by the CDIC or provincial deposit insurance programs.
- Deposit insurance doesn’t cover mutual funds, stocks, bonds, Exchange Traded Funds (EFTs), cryptocurrencies or losses due to fraud or theft.
- Deposit insurance doesn’t cover mutual funds, stocks, bonds, Exchange Traded Funds (EFTs), cryptocurrencies or losses due to fraud or theft.
