The addition of a regulated and diversified system, according to the experts consulted, ensures that Canadians have a high level of confidence in the banking system. (Photo: Getty Images)
Although US President Joe Biden wanted to be reassuring on Monday by stressing that customers of Silicon Valley Bank (SVB), and other troubled banks, would not lose their deposits, the California bank’s bankruptcy once once more puts highlight the important differences between the American and Canadian banking systems.
Less volatile and more resilient, the Canadian system may not be totally immune to crisis, but it remains traditionally more stable due to its structure and mechanisms. Here are three themes, why the SVB saga is unlikely to spread here.
Regulations
This is the first term that comes to mind of two experts consulted by Deals. “The Canadian banking culture is more conservative and less ‘cowboy’ than that in the United States,” says Norma Kozhaya, vice-president of research and chief economist at the Conseil du patronat du Québec. “The conditions of capitalization are more severe and important in Canada than in the United States”, she continues.
“Better capitalized, Canadian banks are also subject to “stress tests”. It’s like scenario analyses. What happens if interest rates go up? If the real estate market is struggling? These scenarios are used to determine where the system might sink, to find where the potential faults are. In this way, we will try to close the gaps before it happens, ”explains Simon Brière, market strategist at RJ O’Brien and associates.
Read also: SVB, biggest bank failure in the United States since 2008, shakes up the sector
Diversification
In the comparative analysis between the Canadian and American systems, diversification is an important term. Certainly not because of the number, since with its six major banks, Canada is far from the United States where one can do business with no less than 4,550 regional banks. Not to mention the big players like Bank of America, JP Morgan, Goldman Sachs and others.
It is therefore elsewhere that we must look to fully understand the difference. “In Canada, we are diverse across the entire country. Regionally, but also in economic activities. Of course, there is an orientation towards the products and resources that we have, but that is not as sharp as in a deregulated bank like SVB with a strong technological flavor,” underlines Simon Brière.
“Moreover, continues Mr. Brière, to return to the first element, these 4550 banks, since the era of Donald Trump, have been deregulated. This has made it possible to do business sometimes in a questionable way.”
Trust
The addition of a regulated and diversified system, according to the experts consulted, ensures that Canadians have a high level of confidence in the banking system. This trust is one of the foundations of its stability. In other words, the risk of seeing a rush to ATMs to withdraw funds from a bank is rather low.
“In Canada, as we know that the banks are regulated and supervised and that there is the Deposit Insurance Corporation, I believe that we do not have a problem of trust. It is certain that there can be crises, but we have seen that in general, our banking system is holding up well, ”recalls Norma Kozhaya.
“Today, SVB depositors will be compensated, which is good. But what is less so is that it’s a bit of a symptom of Far West. In Canada, I have not seen anyone rush to the bank and withdraw all their funds at once. The confidence of depositors in Canada means that we look at it from above and from afar,” observes Simon Brière.
“One element that might demonstrate that confidence is shaken on the American side is the resurgence of popularity of cryptos, he continues. Bitcoin for example. It has increased by 25 to 30% since the bankruptcy of SVB. This is a point that shows that confidence is shaken. It will come back. I don’t think it’s a big deal, but it fits into other elements of this overheating economy. Maybe we shouldn’t dwell on it, but we shouldn’t ignore it either.”
