Canada’s banking system is an integral part of the country’s economic infrastructure, serving as a pillar of stability and trust. However, the system’s deep connection with the United States’ banking system has proven to be a curse more than a blessing.
Canada has been exposed to a number of economic shocks owing to reliance on its Southern neighbours and this time too the fallout from Silicon Valley Bank’s collapse has erased around $14.2 billion in value from Canada’s top banks.
As a result of the consequences from Silicon Valley Bank’s failure, financial stocks have fallen across the country, wiping C$19.7 billion ($14.2 billion) off the value of Canada’s major banks in the last four days.
On 10th of March 2023, some of the major lenders in the country, including Bank of Nova Scotia, Bank of Montreal, and Toronto-Dominion Bank, had losses of more than 2%. The S&P/Toronto Stock Exchange Composite Index, which includes banking shares as its largest sector by weight, fell more than the S&P 500 as the market was shaken by the biggest US bank failure in more than a decade.
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Big Canadian banks have recently bought small US banks, increasing their vulnerability to the effects of Silicon Valley Bank’s bankruptcy, which went into receivership on the 10th of March. In 2019, SVB Financial Group established a presence in Canada and announced Shopify Inc. as a customer. Shopify was among the top decliners in Toronto and did not reply to a request for comment.
It is to be noted here that even in times of economic turmoil, such as the 2008 financial crisis, Canada has suffered significant losses due to its reliance on the US banking system. Despite having a regulatory framework and financial institutions that operate independently of the US, Canada’s economy and financial system are highly integrated with its southern neighbour.
Even during the COVID-19 pandemic, Canada saw fewer deaths compared to the US, but the country’s economy still took a significant hit due to its dependence on the US banking system. Think tanks have warned Canadian banks that they may lose billions of dollars in the coming years as a result of their over-reliance on Western banks.
The report by C.D. Howe Institute released a month back already warned that the Bank of Canada may lose up to $8.8 billion over the next few years. The report warned the central bank may run into a communications challenge as a result of the losses.
The report estimated the total losses over the next two to three years will add up to between $3.6 and $8.8 billion.
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The recent fallout from Silicon Valley Bank’s collapse has had ripple effects across the continent, leading to a selloff in financial stocks that has erased billions of dollars in value from Canada’s top banks in just a few days.
It is clear that Canada’s banking system needs to find ways to reduce its dependence on the US banking system and establish greater autonomy. While this is easier said than done, the country must take steps to ensure the stability and resilience of its financial system. This may include increasing investments in domestic financial institutions and exploring new partnerships and collaborations with international banks that are not heavily linked to the US banking system.
