With Silicon Valley Bank’s sudden collapse earlier this month, the United States saw the second-biggest bank failure in its history and the largest since the 2008 financial crisis. Your news feed has likely been inundated with stories, debates, and speculation about the collapse ever since.
But there’s one big question that hasn’t received enough attention: how is this impacting Canada?
Canada’s financial system has long been hailed for its relative stability and resilience. Case in point? We haven’t seen a bank failure since 1996, and our banking system weathered the financial storm that brought down several American banks in 2008.
Because Silicon Valley Bank never actually provided banking services to companies or individuals based in Canada, the fallout on our side of the border has been minimal. Nevertheless, Canadian government officials and regulators have been scrambling to address the situation and to make sure that the aftershocks do not spill over.
Just days after the collapse, the Office of the Superintendent of Financial Institutions (OSFI) – Canada’s banking regulator – formally took over SVB’s domestic operations. A few days later, OSFI permanently took control of the bank’s Canadian assets and began the process of handing them over to American regulators.
All in all, it’s beginning to look like Canada will emerge from the Silicon Valley Bank collapse largely unscathed, even standing apart from the Swiss who haven’t been faring as well. But that does not mean we cannot learn a thing or two.
One of the major factors behind Silicon Valley Bank’s sudden collapse – and the reason why the United States has seen more bank failures than we have – is the absence of robust regulation.
Just look at the Dodd-Frank Act, an Obama-era bill that overhauled the financial regulatory system requiring banks with more than $50 billion in assets to be held to higher standards and be subject to measures like stress tests. That law was partially rolled back by the Trump Administration in 2018, paving the way for banks, like SVB and Signature, to engage in what can be viewed as riskier behaviour, which may have contributed to their demise.
Those suggesting Canadians should pat ourselves on the back and rest easy knowing that our highly concentrated banking system will save us from similar crises are largely missing the point. We should take the Silicon Valley Bank drama as an opportunity to reflect on whether our system is properly and sufficiently regulated.
In Canada, the Liberal government is working to amend the Retail Payment Activities Act (RPAA) and reform the Competition Act, while awaiting recommendations on how best to implement a ‘Canadian-made’ open banking regime. These recent events underscore the importance of financial sector policy – admittedly not the sexiest ballot box issue. This situation merits attention, not gloating. Let’s ensure we can always laud a Canadian financial system that is robust, comprehensive and innovative.
SVB should inspire renewed attention on financial policy for Canadian decision-makers. Canadians like the stability of our financial sector, but resting on our laurels is not an effective approach to banking regulation.