Silicon Valley Bank
Mar 17, 2023

The Silicon Valley Bank collapse and what it means for Canadians

By now, you’ve likely heard about the Silicon Valley Bank failure in the US, and the subsequent failure of two smaller regional banks. With so much talk on social media and in the news, it’s understandable that Canadians are concerned. We want to put your mind at ease.

First of all, what exactly happened?
Silicon Valley Bank (SVB) grew to be one of the top lenders for tech startups, willing to loan them funds when more traditional banks were not. Some of these startups became very successful. Problems began in 2021 when many of these tech startups deposited large amounts of cash with the bank. SVB invested those deposits in longer-term bond securities, at very low interest rates.

As interest rates began to rise, these long-term bond investments began to lose their value. The rising interest rates also made money more expensive, so investors became increasingly risk averse. This impacted tech startups, SVB’s primary clients. Because it was so difficult and expensive to borrow money, some of SVB’s clients began to withdraw funds from their accounts to meet their liquidity needs. To meet customers’ withdrawals, SVB was forced to sell significant amounts of their bond portfolio at a loss. At the same time, clients continued to withdraw cash at a faster rate than the bank anticipated.

The bank announced plans to raise additional capital by selling stock and issuing debt securities and the share price plunged. Clients began to increasingly lose confidence and pull their money from the bank which scared off investors and the plan to raise capital collapsed. A classic run on the bank occurred and the federal regulators took control of the bank on March 10.

How did/will this impact Canadians?
Because Canada’s big five banks have acquired regional US banks in recent years, their stocks were down in the immediate aftermath of the SVB failure. However, the large Canadian banks have broad diversification, with a large variety of sectors as both their depositors and borrowers, so the long-term concerns are limited. Conversely, SVB had a very narrow market – tech startups.

As well, there is some speculation that the Bank of Canada will pause rate hikes, or even possibly cut interest rates by August, to offset the drop in bond yields that have resulted from the US banking sector turbulence.

Could it happen here?
Although no financial institution has zero risk of failure, Canada has a long history of very stable financial institutions. In fact, the World Economic Forum has ranked Canada’s financial system as one of the best in the world. There were no bank or credit union failures in Canada during the Great Depression, World War 2 or the Subprime Mortgage Crisis of 2008. In fact, the last bank failure in Canada was Calgary-based Security Home Mortgage Corporation in 1996 and the last national bank failure was Home Bank of Canada in 1923!

Many of the circumstances that led to the SVB failure don’t apply to the Canadian banking sector. As mentioned earlier, the vast majority of Canadian banks and credit unions, including Kindred, take in broad deposits from a variety of sources and sectors, whereas SVB was concentrated in only one sector of the market – tech startups.

Furthermore, the regulatory environment in Canada is much more conservative than in the US. The Office of the Superintendent of Financial Institutions (OSFI) is an independent agency of the Government of Canada, and has been increasing the safeguards that are in place around the Canadian financial system. For example, Canada’s six largest banks have something called the Domestic Stability Buffer, which mandates how much they must have set aside in a “rainy-day fund” for times of financial uncertainty. For credit unions in Ontario, capital adequacy requirements are regulated by the Financial Services Regulatory Authority of Ontario (FSRA)

As well, awareness of deposit insurance, whether the Canadian Deposit Insurance Corp. (CDIC) for chartered banks and federally regulated credit unions and Deposit Insurance Reserve Fund (DIRF) for Ontario credit unions, is high among Canadians and Ontarians. As a result, people are less likely to be swayed by social media rumours of bank or credit union stability, lessening the likelihood of panic.

At Kindred, eligible deposits in registered accounts (RRSP, RESP, RDSP, TFSA and RRIF) have unlimited coverage through FSRA. Eligible deposits that are not in registered accounts are insured up to $250,000 through FSRA. As well, Kindred continues proactively take deliberate measures so that we can maintain stability despite the volatility of the markets.

Make peace with your money, and know that Kindred has you covered.

Kindred Credit Union

Kindred Credit Union

Kindred Credit Union At Kindred, we believe you have a better choice for banking. We believe values and faith are central to life, and financial decisions are not values-neutral. In fact, we think financial decisions can impact the world in amazing ways—so our values are integrated into everything we do. We call this Banking with Purpose.