Canada’s banking regulator is increasing its monitoring of domestic banks’ financial health as the fallout from Silicon Valley Bank’s failure ripples through markets, even after U.S. leaders introduced rare measures designed to avoid repeating the run on deposits that toppled the tech-lending leader.
The Office of the Superintendent of Financial Institutions took control of SVB’s Canadian operations on Sunday, and on Monday the regulator took steps to begin daily check-ins with banks that will enable it to monitor their liquidity, according to two sources with knowledge of the decision. The frequent updates are a precautionary tool last used in the early months of the COVID-19 pandemic, designed to provide an early warning if any signs of stress emerge.
The Globe and Mail is not identifying the sources, because they were not authorized to discuss regulatory matters.
Facing acute fears of contagion in the U.S. financial sector, President Joe Biden pledged early Monday to do “whatever is needed” to shore up the American financial system and provide stability for depositors. His wording seemed like a deliberate echo of the now-famous phrase from former European Central Bank president Mario Draghi, who pledged in 2012 to do “whatever it takes” to protect the euro during the region’s sovereign debt crisis.
Mr. Biden and other U.S. officials also took pains to stress that a set of supports they unveiled Sunday night, including a major funding program that will provide banks with liquidity by acquiring their balance sheet assets at full value, are not full-blown bailouts. Shareholders of Silicon Valley Bank and New York-based Signature Bank, which also folded, will not get their money back – but depositors will.
Even so, the U.S. backstop for banks and depositors is the most significant package of measures implemented since the global financial crisis in 2008. It is designed to instill confidence in the banking sector and stamp out any sense of panic that could spur more customers to pull cash from banks.
Despite the U.S. government’s reassurances, investors are still struggling to make sense of the chaos. Early Monday, they sold U.S. bank stocks in droves – particularly those of regional lenders. Many bank shares recouped large portions of the losses throughout the trading day, and the S&P 500 and the Nasdaq both closed relatively flat. But the KBW Nasdaq Bank Index, which tracks the performance of U.S. banks, still closed 12 per cent lower Monday, and is down 28 per cent over the past month.
Investors are particularly skittish about banks where uninsured deposits make up a large portion of the deposit base. On this front, Silicon Valley Bank and Signature Bank had some of the worst ratios in the industry, with 89-per-cent and 94-per-cent uninsured deposits, respectively. Most U.S. regional banks have between 50 and 70 per cent of deposits uninsured, including the U.S. subsidiaries of Toronto-Dominion Bank, Bank of Montreal, Canadian Imperial Bank of Commerce and Royal Bank of Canada.
As the brutal blow sent U.S. policy-makers scrambling to safeguard the country’s economy from further consequences, the immediate threat is less pronounced in Canada, where the largest lenders are highly diversified and deposits have grown in recent quarters, bucking the trend south of the border.
“From a Canadian perspective, 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, which is dominated by a few large and diversified players,” Scotiabank analyst Meny Grauman said in a note to clients.
Even so, Canada’s regulator is taking extra precautions. OSFI has told banks that, starting as early as Tuesday and until further notice, they will be required to send the regulator liquidity reports each day through an existing monitoring tool that tracks banks’ financial positions, the two sources said. The added monitoring is not a sign of imminent concern, they said, but it is an attempt to keep on top of a fast-moving situation that has dramatically increased uncertainty for the sector.
An OSFI spokesperson said the regulator does not discuss supervisory measures.
Federal Finance Minister Chrystia Freeland’s office said in a statement that she met with OSFI superintendent Peter Routledge on Monday, and has had meetings with the heads of financial institutions and officials from the Bank of Canada.
“The government wants to assure Canadians our financial institutions are stable and resilient,” the statement said.
OSFI’s decision to take temporary control of SVB’s domestic operations on Sunday followed similar actions in the U.S. and Britain, where regulators had already launched processes to seek out buyers for the bank’s assets.
The Canadian regulator’s announcement was just the first move in a longer process that could result in the bank’s Canadian assets being put up for sale in the coming days. The regulator said Sunday that it plans to apply for a court order this week to wind up SVB’s Canadian operations.
SVB’s Canadian arm is unusual in that it has a license to lend, but it cannot take deposits. While some Canadian startups had deposits with the bank’s U.S. arm, the Canadian operation did not hold any client money.
SVB is a small lender in Canada. The tech financer had US$692-million in assets and US$349-million in outstanding loans in Canada as of December, according to OSFI filings. By comparison, CIBC had $2.9-billion in loans through its innovation banking arm as of Oct. 31, 2021. A bank looking to bolster its lending to startups could potentially scoop up SVB’s loan book at a steep discount.
The last time OSFI took control of a foreign bank branch was in 2016, when Germany’s banking regulator suspended Maple Bank GmbH after a tax refund dispute cast doubt over the institution’s stability. Maple’s business in Canada included securitization of mortgage receivables, fixed-income trading and structured finance, as well as a small amount of wholesale deposits from German depositors.
Within a week of Germany’s regulator shuttering the foreign bank, OSFI moved to liquidate its Canadian operations. Months later, Toronto-based Equitable Group struck a deal with the Canada Mortgage and Housing Corp. to buy $3.1-billion of mortgage-backed security pools issued by Maple’s domestic arm.
If OSFI moves SVB Canada into insolvency proceedings, the regulator will be able to launch an auction to seek out a buyer for the bank’s assets. SVB’s U.K. subsidiary – which did hold customer deposits – was sold to HSBC Group PLC for one pound on Monday. Meanwhile, U.S. regulators are still searching for a buyer of the bank’s U.S. business.
The startup lender’s arrival in Canada four years ago helped stoke competition in the banking sector as the country’s largest financial institutions – including RBC, CIBC and National Bank of Canada – expanded their own tech lending businesses to grab market share in a then-flourishing sector.
The turmoil in U.S. banking also threatens to throw a wrench in some Canadian banks’ expansion plans.
Nashville-based First Horizon Corp. struggled again Monday, with its shares falling 20 per cent, bringing their total loss to 35 per cent over the past two weeks. The drop has major implications for Toronto-Dominion Bank, which has a pending deal to buy First Horizon for US$13.4-billion.
TD agreed to buy First Horizon for US$25 per share. The U.S. bank’s share price closed at US$16.04 on Monday. But the proposed acquisition was already facing challenges before Silicon Valley Bank collapsed. TD disclosed in early March that the deal was struggling to receive regulatory approvals in a timely manner and that the two banks had not yet agreed on extending the merger deadline past May 27.
“We will continue to assume that TD is committed to the transaction and that the acquisition will eventually be approved until facts suggest otherwise, but we recognize the uncertainty with the situation that could cause some volatility with TD’s stock,” RBC Capital Markets analyst Darko Mihelic said in a note to clients.
Elizabeth Goldenshtein, a spokesperson for TD, said the bank had no update on the transaction on Monday.