Silicon Valley Bank Aftermath: Are We Ok?

Silicon Valley Bank Aftermath: Are We Ok? The recent downfall of a prominent U.S. bank, Silicon Valley Bank, has led many to speculate on the continued vulnerability of our financial system and the stability of the banking system at large.

What happened?

In March 2023, the California Department of Financial Protection and Innovation closed Silicon Valley Bank (SVB), headquartered in Santa Clara, California. S&P Global analyzed $151.6 billion of uninsured deposits at Silicon Valley Bank, and while it is unclear how individuals and firms stand to lose in the face of government support, we all should recognize that this never should've happened.

One of the primary issues facing the Silicon Valley Bank was their heavy investment in government bonds and mortgage-backed securities, which lost massive value as the U.S. Federal Reserve increased interest rates. When confronted with liquidity problems, the bank sold off these investments at a loss, causing panic among depositors and—among other contributing factors—experienced massive withdrawals by depositors with what some are calling the first Twitter-fueled bank run.

While bank closures are not unprecedented, with over 550 banks shutting down between 2001 and early 2023; SVB's failure garnered significant attention for good reason. It not only fueled existing recession concerns in the U.S. but also marked the largest bank collapse since Washington Mutual's closure during the 2008 financial crisis.

How does this impact us in Canada?

With the US experiencing its second-largest bank failure in history, and global financial stocks losing $465 billion in market value in two days in the wake of Silicon Valley Bank’s collapse, now is a good time to understand and reflect on our Canadian banking system.

Canadian banking is largely recognized as more stable and secure than that of its US counterparts.

Weathering previous financial crises, such as the 2008-2009 financial crisis, relatively unscathed. Canada's last bank failure was in 1996, contrasting to the aforementioned 550 banks in the US since 2001.

While there were concerns regarding Canadian banks' liquidity at the time due to the sudden drying up of capital markets, there was never any question about the safety of the Canadian banking system. Since then, the banking system has become even more secure, with higher requirements to hold liquid reserves and maintain capital.

Canadian Regulators like the Office of the Superintendent of Financial Institutions, the Bank of Canada, and the Canada Deposit Insurance Corporation (CDIC) are in place to maintain the stability of the nation's banks. Moreover, the largest six banks in Canada are labeled as "systemically important," meaning they are recognized to be treated differently from smaller banks in case of potential failure.

That greater concentration of the Canadian banking sector around the Big Six banks is contributing factor that makes the Canadian banking sector more secure. While smaller financial institutions exist in Canada, they are typically credit unions, whereas in the US, there are numerous small and medium-sized regional banks that often serve business clients with deposits exceeding the maximum insurable amount of US$250,000.

In general, Canadian banks are better regulated and stress-tested compared to U.S. banks. This has resulted in stricter requirements for holding liquid reserves and capital in the Canadian banking system. On the other hand, American banks with assets under $250 billion are classified as small banks and face more lenient liquidity requirements.

While no bank is immune to what happened with the Silicon Valley Bank, the Canadian system is set up in a way with precautions and regulations to ensure conservative banking practices provide a strong monetary foundation.