As regulators struggle to juggle 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 dependent 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 biggest American banks and the Canadian banks and [latino-américaines] that we hedge have much smaller securities assets on a relative basis. »
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.
He added, however, that any broader spillover into the California market from Silicon Valley Bank could put Bank of Montreal at greater risk, given its recent acquisition of Bank of the West. The Royal Bank of Canada has also been present in this state since its acquisition of City National in 2015.
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.
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.