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| DOING HIS CHURCH LADY IMITATION |
Bank of Canada Governor Tiff Macklem takes part in a news conference after announcing an interest rate decision in Ottawa.
Opinion Special to Financial Post •
By Steve Ambler and Jeremy Kronick
Last week, the Bank of Canada held its overnight rate, its benchmark policy rate, at 4.5 per cent . No surprises there. In its last announcement, the bank told us the data were consistent with their view that, with the target rate where it is, inflation would come back down to three per cent by the middle of this year. Data since have not changed governing council’s view that at present more tightening wasn’t necessary.
In fact, if anything, the major economic development over the last six weeks, the failures of Silicon Valley Bank (SVB) and Signature Bank , as well as the emergency takeover of Credit Suisse by UBS Group AG , made caution even more prudent. Furthermore, it might actually make the Bank of Canada’s fight against inflation easier.
The U.S. crisis resulted from poor banking risk management, in particular poor interest rate management, and a failure of supervision. SVB was the banker to the tech sector and the venture capitalists that supported them. In the years leading up to the crisis, the institution received a massive influx of deposits, many of which, because of their sheer size, were uninsured, and thus, a flight risk.
This made it hard for SVB to find a home for all the deposits, and so they invested heavily in long-term bonds when interest rates were very low. The Federal Reserve’s rate hikes caused a paper loss on SVB’s holdings of long-term bonds. When interest rates go up, bond values fall. When depositors realized this and attempted to withdraw their funds, SVB was forced to sell assets to honour the withdrawals, and the paper losses became real. A liquidity problem turned into insolvency. Signature Bank failed shortly after, and systemically important Credit Suisse was taken over by its former competitor, UBS.
The root cause of this banking crisis is the fact that central banks all over the world have been raising interest rates in order to cool off inflation. But, therein lies the rub: what to do if you must continue fighting entrenched inflation but at the risk of increased financial instability?
The Fed’s March interest rate announcement (two weeks after the banking crisis began) insisted that there were no issues with the “sound and resilient” U.S. banking system. And, despite pleas in some corners to pause the rate hikes in light of SVB’s collapse, the Fed plowed ahead with a 25-basis-point hike on March 21. However, pundits and markets have revised downwards their expectations of how high the Fed’s policy rate will ultimately go.
What does this all mean for the Bank of Canada?
First, that it deserves credit for being the first central bank to begin the monetary policy tightening process, which has allowed them to get inflation down faster than other countries and means they have minimized the potential trade-off with financial stability should there be spillovers here at home from the banking crisis abroad.
Second, the fight against inflation might be easier as a result of this crisis. Less tightening by the Fed means less of a differential between U.S. rates and Canadian rates. A larger differential would have put downward pressure on the Canadian dollar, increasing import prices and putting upward pressure on inflation. The bank’s inflation fighting strategy involves tempering increases in demand, and a lower Canadian dollar would work against this by boosting the demand for Canada’s exports.
Moreover, as credit conditions tighten globally because of the bank collapses, borrowing becomes more difficult, including in Canada, which will reduce domestic aggregate demand.
There are other encouraging signs for global inflation. Headline inflation is decreasing in most major economies, helped partly by lower energy prices. It is still generally higher than Canada’s headline inflation, although in the U.S., March headline inflation (announced just before the Bank of Canada’s announcement) dropped to five per cent, a full percentage point lower than the previous month. The International Monetary Fund has also revised down its estimates for world economic growth, which will help to calm inflation globally.
We’re not out of the woods, but we are beginning to see more light through the trees. If Canadian inflation continues to abate with an overnight rate target of 4.5 per cent, the bank may succeed in slaying inflation while not throwing the economy into recession. Strange to say, but SVB’s collapse might have made that outcome more likely.
Steve Ambler is professor of economics, Université du Québec à Montréal and David Dodge Chair in Monetary Policy at the C.D. Howe Institute, where Jeremy Kronick is Director, Monetary and Financial Services Research.
By Steve Ambler and Jeremy Kronick
Last week, the Bank of Canada held its overnight rate, its benchmark policy rate, at 4.5 per cent . No surprises there. In its last announcement, the bank told us the data were consistent with their view that, with the target rate where it is, inflation would come back down to three per cent by the middle of this year. Data since have not changed governing council’s view that at present more tightening wasn’t necessary.
In fact, if anything, the major economic development over the last six weeks, the failures of Silicon Valley Bank (SVB) and Signature Bank , as well as the emergency takeover of Credit Suisse by UBS Group AG , made caution even more prudent. Furthermore, it might actually make the Bank of Canada’s fight against inflation easier.
The U.S. crisis resulted from poor banking risk management, in particular poor interest rate management, and a failure of supervision. SVB was the banker to the tech sector and the venture capitalists that supported them. In the years leading up to the crisis, the institution received a massive influx of deposits, many of which, because of their sheer size, were uninsured, and thus, a flight risk.
This made it hard for SVB to find a home for all the deposits, and so they invested heavily in long-term bonds when interest rates were very low. The Federal Reserve’s rate hikes caused a paper loss on SVB’s holdings of long-term bonds. When interest rates go up, bond values fall. When depositors realized this and attempted to withdraw their funds, SVB was forced to sell assets to honour the withdrawals, and the paper losses became real. A liquidity problem turned into insolvency. Signature Bank failed shortly after, and systemically important Credit Suisse was taken over by its former competitor, UBS.
The root cause of this banking crisis is the fact that central banks all over the world have been raising interest rates in order to cool off inflation. But, therein lies the rub: what to do if you must continue fighting entrenched inflation but at the risk of increased financial instability?
The Fed’s March interest rate announcement (two weeks after the banking crisis began) insisted that there were no issues with the “sound and resilient” U.S. banking system. And, despite pleas in some corners to pause the rate hikes in light of SVB’s collapse, the Fed plowed ahead with a 25-basis-point hike on March 21. However, pundits and markets have revised downwards their expectations of how high the Fed’s policy rate will ultimately go.
What does this all mean for the Bank of Canada?
First, that it deserves credit for being the first central bank to begin the monetary policy tightening process, which has allowed them to get inflation down faster than other countries and means they have minimized the potential trade-off with financial stability should there be spillovers here at home from the banking crisis abroad.
Second, the fight against inflation might be easier as a result of this crisis. Less tightening by the Fed means less of a differential between U.S. rates and Canadian rates. A larger differential would have put downward pressure on the Canadian dollar, increasing import prices and putting upward pressure on inflation. The bank’s inflation fighting strategy involves tempering increases in demand, and a lower Canadian dollar would work against this by boosting the demand for Canada’s exports.
Moreover, as credit conditions tighten globally because of the bank collapses, borrowing becomes more difficult, including in Canada, which will reduce domestic aggregate demand.
There are other encouraging signs for global inflation. Headline inflation is decreasing in most major economies, helped partly by lower energy prices. It is still generally higher than Canada’s headline inflation, although in the U.S., March headline inflation (announced just before the Bank of Canada’s announcement) dropped to five per cent, a full percentage point lower than the previous month. The International Monetary Fund has also revised down its estimates for world economic growth, which will help to calm inflation globally.
We’re not out of the woods, but we are beginning to see more light through the trees. If Canadian inflation continues to abate with an overnight rate target of 4.5 per cent, the bank may succeed in slaying inflation while not throwing the economy into recession. Strange to say, but SVB’s collapse might have made that outcome more likely.
Steve Ambler is professor of economics, Université du Québec à Montréal and David Dodge Chair in Monetary Policy at the C.D. Howe Institute, where Jeremy Kronick is Director, Monetary and Financial Services Research.
'Canada's a paragon of safe banking': Why Canada has had no bank failures since 2001, while the U.S. has had hundreds
Story by MoneyWise • Monday
Provided by MoneyWise Canada
The collapse of U.S. banks like Silicon Valley Bank might have you asking: what happens if a Canadian bank fails? Luckily, the way Canadian banks are set up means the chance of failure is very, very low.
“Since 2001, America has had 562 bank failures,” said Mathie Labrèche, director, media strategy and communications with the Canadian Bankers Association. “In Canada, that number’s zero.”
Still, with high inflation, fears of a recession — and our tight economic ties with our southern neighbours — you might be feeling a little anxious.
To help assuage any fears you may have, we spoke to Labrèche and Alex Ciappara, director, credit market and economic policy with CBA, to find out how safe your money is in Canadian banks.
Canadian banks feel the stress
Unlike the U.S., all banks in Canada must pass stress tests, regardless of their size.
The stress tests expose banks to “exceptional but plausible” circumstances. The conditions of the test help to identify risk. For instance, the stress test will see how a bank performs during economic slumps.
“Canada’s a paragon of safe banking,” said Labrèche.
He points to the banking crisis of 2008 and the pandemic as massive financial downturns that the Canadian banking system was able to not only withstand, but stay strong throughout.
“Banks are well managed, well regulated, well diversified and well capitalized,” said Ciappara.
Each of these elements plays a role in ensuring that Canadian banks are less likely to fail, meaning that your money is safer when deposited in a Canadian bank.
Canadian banks are well managed
Having a well-managed bank ensures that the daily operations — everything from loans to deposits — are safe and secure. Ciappara points to the nation’s mortgage delinquency rates to demonstrate a key difference between the U.S. and Canada.
Mortgage delinquency happens when a homeowner is at least 30 days behind on a mortgage payment. According to the CBA, the mortgage delinquency rate was 0.15 per cent nationally in 2022, compared to 1.77 per cent in Q4 in the U.S. In the U.S. the rate reached a high of 11.50 per cent following the Great Recession of 2008 to 2009. In Canada, we only reached 0.45 per cent in that same time period.
Canadian real estate debt totals $ 2,267.8 billion ; which is still a lot of cash to lend out. However, the fact that there is such a low delinquency rate demonstrates how effective our banks are at managing that debt.
This ability to identify risk is one factor that keeps cash flow healthier, meaning the banks are in better financial health and are less likely to fail. Canada also has a more unified approach for insuring the money you deposit.
Canadian banks are well insured
When you deposit your money in a Canadian bank, you can rest assured that it’ll be there when you go to take it out.
That’s because the Canada Deposit Insurance Corporation (CDIC) will insure up to $100,000 per account, per institution.
The CDIC is a Crown corporation that provides insurance for bank deposits, and protects account holders in the event of a bank failure.
You could have $100,000 deposited in an account under your name at one bank, and another $100,000 deposited at another. Both deposits would be insured by the CDIC. Even if the bank should fail, your money would still be available to you.
Ciappara points out that there are different categories that CDIC insurance applies to and each has $100,000 of coverage. The insured categories are:
Deposits held in your name (e.g. chequing account)
Deposits held in the name of two or more people (e.g. joint accounts)
Deposits held in trust. (Up to $100,000 per beneficiary named in a trust)
Deposits held in a registered retirement savings plan (RRSP)
Deposits held in a Registered Education Savings Plan (RESP)
Deposits held in a registered retirement income fund (RRIF)
Deposits held in a tax-free savings account (TFSA)
Deposits held in a first home savings account (FHSA)
Deposits held in a Registered Disability Savings Plan (RDSP)
Just like the banks diversify where their money is invested, you should follow the same process.
Spreading out your investments in a variety of funds minimizes the risk of any investments failing. And if you put your money in one of the areas protected by CDIC insurance, you have the added benefit of knowing that you have extra protection should a bank failure occur.
Canadian banks are well regulated
In Canada, the Office of the Superintendent of Financial Institutions (OSFI) ensures that banks are not likely to have massive failures.
While the OSFI is the single prudential regulatory office in Canada — that is, the office that supervises, regulates and monitors financial institutions — there are various regulators in the U.S.
Ciappara believes a single regulator ensures greater security, since there is “a clear line of communication between the regulator and the banking system.” Basically, there is a single third-party entity in place to ensure that the bank is operating with the best practices.
When you have one organization ensuring that everything is operating smoothly, you know that a certain standard is being met. When you have many regulators overseeing things, there’s no clear regulatory system, increasing the chances of failure. In Canada, there is less chance of any major upheavals that will affect your assets.
Canadian banks are well diversified
You might have noticed that the U.S. has more smaller, regional banks than we have in Canada.
The sheer number of smaller banks operating makes it more difficult to diversify their credit risk, revenues and funding.
As Ciappara points out, “as goes the economic fortunes of a town, so do the results of the bank.”
Having national banks ensures their strength isn’t tied to a single, regional economy. This means that even if one type of industry faces hardship, the wide range of customers and services will keep the establishment going.
Canadian banks are well capitalized
The next time you borrow money from your bank, know that you’re helping the security of our financial institutions.
Ciappara says that Canadian banks maintain strong capital, in part thanks to their ability to earn income on the loans they distribute. There is a healthy cash flow, which reduces the chance of failure.
In the case of Silicon Valley Bank, one cause of the failure was customers rushing to withdraw their funds. The ability to maintain strong capital ties into our banks being well diversified and demonstrating ”solid credit risk management practices.” At the end of the day, there’s less risk of you being affected by other account holders withdrawing their funds.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
Story by MoneyWise • Monday
Provided by MoneyWise Canada
The collapse of U.S. banks like Silicon Valley Bank might have you asking: what happens if a Canadian bank fails? Luckily, the way Canadian banks are set up means the chance of failure is very, very low.
“Since 2001, America has had 562 bank failures,” said Mathie Labrèche, director, media strategy and communications with the Canadian Bankers Association. “In Canada, that number’s zero.”
Still, with high inflation, fears of a recession — and our tight economic ties with our southern neighbours — you might be feeling a little anxious.
To help assuage any fears you may have, we spoke to Labrèche and Alex Ciappara, director, credit market and economic policy with CBA, to find out how safe your money is in Canadian banks.
Canadian banks feel the stress
Unlike the U.S., all banks in Canada must pass stress tests, regardless of their size.
The stress tests expose banks to “exceptional but plausible” circumstances. The conditions of the test help to identify risk. For instance, the stress test will see how a bank performs during economic slumps.
“Canada’s a paragon of safe banking,” said Labrèche.
He points to the banking crisis of 2008 and the pandemic as massive financial downturns that the Canadian banking system was able to not only withstand, but stay strong throughout.
“Banks are well managed, well regulated, well diversified and well capitalized,” said Ciappara.
Each of these elements plays a role in ensuring that Canadian banks are less likely to fail, meaning that your money is safer when deposited in a Canadian bank.
Canadian banks are well managed
Having a well-managed bank ensures that the daily operations — everything from loans to deposits — are safe and secure. Ciappara points to the nation’s mortgage delinquency rates to demonstrate a key difference between the U.S. and Canada.
Mortgage delinquency happens when a homeowner is at least 30 days behind on a mortgage payment. According to the CBA, the mortgage delinquency rate was 0.15 per cent nationally in 2022, compared to 1.77 per cent in Q4 in the U.S. In the U.S. the rate reached a high of 11.50 per cent following the Great Recession of 2008 to 2009. In Canada, we only reached 0.45 per cent in that same time period.
Canadian real estate debt totals $ 2,267.8 billion ; which is still a lot of cash to lend out. However, the fact that there is such a low delinquency rate demonstrates how effective our banks are at managing that debt.
This ability to identify risk is one factor that keeps cash flow healthier, meaning the banks are in better financial health and are less likely to fail. Canada also has a more unified approach for insuring the money you deposit.
Canadian banks are well insured
When you deposit your money in a Canadian bank, you can rest assured that it’ll be there when you go to take it out.
That’s because the Canada Deposit Insurance Corporation (CDIC) will insure up to $100,000 per account, per institution.
The CDIC is a Crown corporation that provides insurance for bank deposits, and protects account holders in the event of a bank failure.
You could have $100,000 deposited in an account under your name at one bank, and another $100,000 deposited at another. Both deposits would be insured by the CDIC. Even if the bank should fail, your money would still be available to you.
Ciappara points out that there are different categories that CDIC insurance applies to and each has $100,000 of coverage. The insured categories are:
Deposits held in your name (e.g. chequing account)
Deposits held in the name of two or more people (e.g. joint accounts)
Deposits held in trust. (Up to $100,000 per beneficiary named in a trust)
Deposits held in a registered retirement savings plan (RRSP)
Deposits held in a Registered Education Savings Plan (RESP)
Deposits held in a registered retirement income fund (RRIF)
Deposits held in a tax-free savings account (TFSA)
Deposits held in a first home savings account (FHSA)
Deposits held in a Registered Disability Savings Plan (RDSP)
Just like the banks diversify where their money is invested, you should follow the same process.
Spreading out your investments in a variety of funds minimizes the risk of any investments failing. And if you put your money in one of the areas protected by CDIC insurance, you have the added benefit of knowing that you have extra protection should a bank failure occur.
Canadian banks are well regulated
In Canada, the Office of the Superintendent of Financial Institutions (OSFI) ensures that banks are not likely to have massive failures.
While the OSFI is the single prudential regulatory office in Canada — that is, the office that supervises, regulates and monitors financial institutions — there are various regulators in the U.S.
Ciappara believes a single regulator ensures greater security, since there is “a clear line of communication between the regulator and the banking system.” Basically, there is a single third-party entity in place to ensure that the bank is operating with the best practices.
When you have one organization ensuring that everything is operating smoothly, you know that a certain standard is being met. When you have many regulators overseeing things, there’s no clear regulatory system, increasing the chances of failure. In Canada, there is less chance of any major upheavals that will affect your assets.
Canadian banks are well diversified
You might have noticed that the U.S. has more smaller, regional banks than we have in Canada.
The sheer number of smaller banks operating makes it more difficult to diversify their credit risk, revenues and funding.
As Ciappara points out, “as goes the economic fortunes of a town, so do the results of the bank.”
Having national banks ensures their strength isn’t tied to a single, regional economy. This means that even if one type of industry faces hardship, the wide range of customers and services will keep the establishment going.
Canadian banks are well capitalized
The next time you borrow money from your bank, know that you’re helping the security of our financial institutions.
Ciappara says that Canadian banks maintain strong capital, in part thanks to their ability to earn income on the loans they distribute. There is a healthy cash flow, which reduces the chance of failure.
In the case of Silicon Valley Bank, one cause of the failure was customers rushing to withdraw their funds. The ability to maintain strong capital ties into our banks being well diversified and demonstrating ”solid credit risk management practices.” At the end of the day, there’s less risk of you being affected by other account holders withdrawing their funds.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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