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

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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.

Looking for other resources that will help you navigate the economic landscape as well as the real estate market?

For more on Title Insurance in 2023 as well as some concerns about Title Fraud, click here:

For more on downsizing as an upgrade, click here: 

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David Robertson

Since 2011, Dave brings integrity and professionalism to his clients in Ottawa when helping them buy and sell real estate. Every client matters to Dave.He doesn’t just sell you a home; he builds relationships for life by treating every client with the respect and honesty he would give his own family. Even after the sale of your home, he will continue to be there to answer all your real estate questions and recommend preferred vendors. As an Ottawa native, Dave understands the changes in the local market. Dave's previous industries in banking and home equity have sharpened his expertise in real estate trends. He will professionally explain the real estate process and paperwork involved. As team leader of LIFE Real Estate Group, Dave offers his clients a team of dedicated agents and administrators. Why hire a single realtor when you can hire a team? LIFE Real Estate Group's innovative marketing strategy and commitment to excellence has propelled them to be one of the top teams at Solid Rock Realty! Dave's passion for serving people is the foundation of his success. His goal is to earn the right to be your real estate professional for life. Whether it is creating a customized plan for creating generational wealth through real estate or even home maintenance tips, he is available for all his clients. Message Dave for past testimonials to see how he has helped local families.

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