Silicon Valley Bank collapse presents low risk for Canadian sector: analysts

As regulators move to address the stunning collapse of Silicon Valley Bank, analysts say there is limited fallout risk for the Canadian financial sector.

"Not only should the failure of [Silicon Valley Bank] not have significant negative implications for our banks, but this crisis should actually be viewed as further vindication of the Canadian banking model," said Scotiabank analyst Meny Grauman in a client note Monday, highlighting the stability of Canada's diversified major banks. 

U.S. regulators closed the California-based bank on Friday after a bank run, where fearful depositors concerned about its solvency withdrew billions of dollars all at once. Over the weekend U.S. regulators announced measures to safeguard the financial system, including a guarantee that all deposits at the bank would be honoured. They promised the same for Signature Bank, which regulators forced closed on Sunday.

Canada's banking regulator said late Sunday that it had seized the Canadian assets of Silicon Valley Bank, while emphasizing the limited nature of the crisis and the fact that the bank doesn't hold any commercial or individual deposits in Canada.

"This situation is the result of circumstances particular to Silicon Valley Bank in the United States," said Superintendent of Financial Institutions Peter Routledge in a statement. 

The bank had a heavy lending focus on emerging technology and biotech companies, which experienced massive growth during 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, from both large and small companies, amid the downturn.

As well, the bank's investment portfolio was overly reliant on long-term fixed-rate bonds, which dropped in value as interest rates climbed. That scenario is not really a concern for Canadian banks, said Grauman.

"The reality is that both the largest U.S. banks and the Canadian and [Latin American] banks we cover have much less significant securities holdings on a relative basis."

Canadian banks, along with the sector globally, have also had to deal with the implications of rising interest rates, but most have been doing it better than Silicon Valley Bank, said Alfred Lehar, an associate professor of finance at the University of Calgary's Haskayne School of Business. 

"Interest rates in all the countries have been going up, and I guess some banks are better at managing this change than other banks, and Silicon Valley Bank was obviously a bank that was very poor at managing this transition."

Canadian banks are subject to stress tests on rising interest rates and so far have performed well, said Lehar.

"Banks have passed these stress tests, so there's good reason to believe that the Canadian banks are managing this transition to a different interest regime fairly well so far.”

The Office of the Superintendent of Financial Institutions has also been increasing safeguards around the Canadian financial system, including an increase in the domestic stability buffer that came into effect in February, along with wider leeway to increase how much banks have to set aside for a cash crunch.

It's part of a more conservative regulatory system in Canada that helped the country manage through the global financial crisis, and be pointed to as a model on how to prudently oversee its financial system. 

Silicon Valley Bank, meanwhile, was not subject to the level of scrutiny and stress testing that the biggest U.S. banks face after the Trump administration in 2018 rolled back bank regulations introduced after the financial crisis.

Canadian banks are also much less exposed to the technology sector, said National Bank analyst Gabriel Dechaine, pointing out that financial disclosures among banks that break out the sector in their reporting have exposure of between one and three per cent on their loan books. 

It's in the tech sector that the biggest effect could be felt in Canada, said Lehar, who noted that while the Canadian branch of Silicon Valley Branch was very small, it was very active in the startup space.

"Now that this opportunity is gone, it might be that going forward, it will be harder for Canadian startups to raise financing."

The collapse of Silicon Valley Bank, the biggest bank failure in U.S. history after the collapse of Washington Mutual in 2008, has also pushed down stock prices for numerous other financial institutions.

Those include The Charles Schwab Corp. that is down over 30 per cent since last Wednesday, of which TD owns a 12 per cent stake. Dechaine noted that every 10 per cent drop in Schwab's share price translates into a $1.8 billion decline in TD's stake in the company.

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

Canadian bank stocks have also taken a hit in recent days, with the S&P/TSX banks index down over six per cent in the last week.