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Failure of Silicon Valley Bank would represent little risk for Canada



(Toronto) As regulators grapple with the sudden collapse of Silicon Valley Bank, analysts say the risk of fallout for Canada’s financial sector is limited.

“Not only the bankruptcy of the [Silicon Valley Bank] should not have significant negative consequences for our banks, but this crisis should in fact be seen as further vindication of the Canadian banking model,” Scotiabank analyst Meny Grauman argued Monday in a note to its customers highlighting the stability of Canada’s large diversified banks.

US regulators closed the California bank on Friday, after a bank run that saw its depositors, concerned about its solvency, rush to withdraw their money at the same time. Over the weekend, US authorities announced measures to protect the financial system, including ensuring that all deposits in the bank would be honored. They promised the same for Signature Bank, which was forced to close on Sunday by regulators.

In Canada, the Superintendent of Financial Institutions announced on Sunday evening that it had taken control of the assets of the Canadian branch of Silicon Valley Bank, while insisting on the limited nature of the crisis and the fact that the bank did not hold any commercial deposits. or individual in Canada.

“This is the result of circumstances that are unique to banking in the United States,” Superintendent of Financial Institutions Peter Routledge said in a statement.

Silicon Valley Bank was heavily focused on lending to emerging tech and biotech companies, which saw massive growth in the first two years of the pandemic before the sector pulled back. Tens of thousands of tech workers have been laid off in recent months, at companies large and small, amid the downturn.

In addition, the bank’s investment portfolio was overly reliant on long-term fixed-rate bonds, which fell in value as interest rates rose. That scenario isn’t much of a concern for Canadian banks, Grauman said.

“The reality is that the larger US banks and the Canadian and (Latin American) banks we cover have much smaller securities assets on a relative basis. »

More regulations in Canada

Canadian banks, as well as the global sector, also had to deal with the consequences of rising interest rates, but most did better than Silicon Valley Bank, pointed out Alfred Lehar, associate professor of finance at the Haskayne School of Management at the University of Calgary.

“Interest rates in all countries have gone up, and I guess some banks are handling that change better than others, and Silicon Valley Bank was obviously a bank that was very bad at handling that transition. »

Canadian banks are stress-tested about rising interest rates and so far have performed well, Lehar noted.

“The banks have passed these stress tests, so there is good reason to believe that Canadian banks are handling this transition to a different interest regime quite well so far. »

The Office of the Superintendent of Financial Institutions has strengthened safeguards around Canada’s financial system, including increasing the Domestic Stability Buffer, a measure that came into effect in February, as well as giving itself greater latitude to increase the amount that banks must set aside.

It’s part of a more conservative regulatory system in Canada, which helped the country weather the global financial crisis and can be held up as a model for how to prudently oversee its financial system.

Silicon Valley Bank, meanwhile, was not subject to the level of scrutiny and stress testing to which the largest U.S. banks have been subjected since the Trump administration in 2018 rolled back banking regulations put in place. after the financial crisis.

Canadian banks also have much less exposure to the tech sector, said analyst Gabriel Dechaine of National Bank, pointing out that financial disclosures from banks that break down this sector in their reports have 1% to 3% exposure. in their loan books.

Biggest impact for tech?

The biggest effect could be felt in Canada in the technology sector, Lehar said, noting that while Silicon Valley Branch’s Canadian branch was very small, it was very active in the field of young shoots.

“Now that this opportunity has passed, it may be more difficult for Canadian start-ups to raise funds in the future. »

The collapse of Silicon Valley Bank, the largest bank failure in US history after that of Washington Mutual in 2008, also depressed the stock prices of many other financial institutions.

These include The Charles Schwab Corporation, which is down more than 30% since last Wednesday, in which TD Bank has a 12% stake. Dechaine noted that every 10% drop in Schwab’s share price translates to a $1.8 billion drop in TD’s stake in the company.

It’s unclear how the crisis will affect TD Bank Group’s impending acquisition of US bank First Horizon, but it could allow TD to negotiate better terms, Dechaine said.

Canadian bank stocks have also been hit in recent days, with the S&P/TSX Banks Index falling more than 6% in the past week.

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