US Financial Institutions Defaulting – What Does That Mean For Canada?

With 3 small to mid-sized banks (Silvergate Bank, Silicon Valley Bank, and Signature Bank) in the United States failing over the course of just under a week in March of 2023, you might be asking yourself what the far-reaching implications of such an event actually are.

With many Americans shaken by this experience and with no insurance by the Federal Deposit Insurance Corporation for balances in excess of $250,000 in the case of Silicon Valley Bank, it is a stark realization that our banking system may not be the end-all-be-all for our finances.

So what does the effect of our southern neighbour’s banks collapsing mean for us Canadians?

What could happen if a US Bank collapses?

If a US financial institution were to default, the effects could be far-reaching and could potentially have an impact on global financial markets. The consequences would depend on the size and significance of the institution, as well as its exposure to various markets. 

A US bank collapsing could lead to a freezing of credit markets, a decline in asset values, and a decrease in investor confidence, potentially causing a severe recession.

In the example of the Silicon Valley Bank collapse, $19.7 billion in value was lost due to a sell-off from Canada’s top banks in the days post-collapse. Large Canadian banks have increased their exposure to US banks in recent years with banks like TD, Bank of Nova Scotia, and Bank of Montreal being some of the biggest players. 

How can this impact Canada in the Future?

We estimate that the impact would depend on various factors, including the degree of economic interconnectedness between us and the US at the time and the extent to which our financial institutions are exposed to the US system. 

Because the US is our largest trading partner and we share a highly integrated financial system, a financial crisis in the US could have significant effects on our economy.

Our financial institutions may be exposed to the US’s through direct investments in US banks. For example: If a US financial institution defaults, Canadian banks that hold investments in a US institution or its securities could experience losses.

Additionally, if the financial crisis were severe enough, our financial institutions could experience liquidity problems, this would impact our ability to lend and provide financing to other businesses and individuals.

Overall, a default by a US financial institution could have significant and far-reaching effects on the US and global economy, including the Canadian economy.

That being said, Canadian banks are insulated from the mains issues that led to the collapse of US-based banks due to having a diversified base of clients with less exposure to technology, a higher ratio of loans to deposits, and fewer people withdrawing their funds to invest in higher-paying investments that would otherwise reduce a bank’s capital.

The latest defaulting of these US banks has now forced the US government to reassure Americans that their money in banks is safe as well, resulting in talks about how new legislation is needed as a response to help quell American worry.

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