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After the collapse of Silicon Valley Bank (SVB), experts say that the prospect of a bank failure in Canada remains low and shows the process by which investors can get their money back.
Trevor Tombe, a professor of economics at the University of Calgary, said in a phone interview on Tuesday that Canada has many institutions which ensure that the country’s banking sector remains stable. He said the main regulatory body is the Office of the Superintendent of Financial Institutions (OSFI), which oversees and examines Canada’s leading banks.
Other regulatory bodies include the Bank of Canada and the Canadian Deposit Insurance Corporation (CDIC), which will take over a failing institution if necessary, Tombe said.
“It’s important to remember that there is a knee-jerk reaction for many Canadians. They look south of the border, they see something happening and they say ‘it has to happen here too,'” Laurence Booth, a professor of finance at the University of Toronto, told BNN Bloomberg in a phone interview at Thursday.
In an effort to protect creditors, OSFI announced Wednesday that it is taking over SVB’s Canadian assets indefinitely. The announcement comes after the collapse of SVB, which marked the biggest failure of a US lender in a decade.
THE FLOWER OF THE FLOWER
Tombe said that in Canada, the six largest banks are considered “systemically important,” which means they would be treated differently than a smaller institution in the event of a potential failure.
“They [big six banks] Operations are important to not only the banking system, but the overall Canadian economy, [meaning] they will not be closed. They will just accept them and their jobs will continue. Small banks though, they may be closed,” he said.
In the event of a Canadian bank failure, investors will be reimbursed up to $100,000 per account through an automatic process conducted by the CDIC, Tombe said.
“If it’s an unregistered account, a check is actually sent to you. If it’s something like an RRSP [Registered Retirement Savings Plan]then that takes a little while and they try and move that account to another financial institution,” he said.
CDIC is a government-owned crown corporation that protects over $1 trillion in Canadian deposits, according to its website. The director said that it protects deposits held in member companies of a maximum of $100,000 for each branch issued.
The CDIC said coverage extends to things like savings and checking accounts, guaranteed investment certificates (GICs) and foreign currency. However, CDIC says it does not cover things like mutual funds, securities and bonds, exchange traded funds (ETFs) or cryptocurrencies.
“So the deposits that are guaranteed are only your first $100,000, but that’s per account. So if you want more insurance of your deposits, then you can open multiple accounts in one bank, for example,” said Tombe.
“So it’s not limited to you personally, in terms of the total amount you have in a bank. It’s limited on a report-by-report basis.”
Booth said the current limit for CDIC protection is more than adequate for Canada’s smaller banks, but if one of the country’s big six banks fails then regulators could protect deposits above the $100,000 threshold. account.
“So there is law or regulations and then you find what happens in a desperate situation too,” he said.
Booth said CDCI, the Bank of Canada and OSFI are all coordinating with each other. He said with approval from the Bank of Canada, OSFI can lend money to “almost any organization.”
“So what’s going to happen is that if one of Canada’s big banks gets into serious trouble, I think there’s going to be a bailout or a major bailout for one of the other federal government agencies besides CDIC,” Booth said.
“In all probability, though the exact amount [is] $100,000, there will be some kind of rescue to ensure that deposits greater than $100,000, are protected,” he said, adding that there is uncertainty around how the situation will play out.
According to Tombe, a Canadian bank has not failed since 1996 and the prospect of a failure is much lower today. He said Canada has a high degree of concentration in its banking system and is very different from the US
“And so the big banks are, I don’t want to say zero risk, but basically as zero risk as you can afford to fail,” Tombe said.
“If it gets to the point where there are serious concerns, then their services will simply be taken over by the CDIC, they won’t be shut down because their services are important.”
The prospect of a bank failure in Canada is “extremely bleak,” Booth said because of the conservative nature of banks and regulators.
“The big test for Canadian banks was the financial crisis in the United States in 2008 and 2009,” Booth said.
Amid the 2008 financial crisis, Booth said there were liquidity concerns about Canadian banks only because capital markets “moved suddenly.”
“But there is never any question about the safety of the Canadian banking system. And since then, banking systems are even more secure, there are even more requirements to maintain liquid reserves and preserve capital,” he said.
Shilpa Mishra, a partner and managing director at BDO Canada’s capital advisory practice, said in a phone interview on Thursday there were four main factors that led to the downfall of SVB which reflected the differences between the US and Canadian banking sectors. .
Mishra said a “fundamental lapse” occurred at SVB, particularly regarding its interest rate risk management.
“So they [SVB] have deposits and these mortgage-backed securities. As interest rates rise, bond prices fall. Basically, they have losses and cannot cover their debts,” he said.
Another contributing factor to the downfall of SVB is that it urged the US government to remove regulations a few years ago, Mishra said.
“So they don’t do heavy duty. They don’t need to stress test or review their liquidity coverage,” he said, adding that there is no third-party review of interest-related risk.
In addition, SVB has a very focused customer base in the technology industry, Mishra said.