https://www.cbc.ca/news/business/banking-explainer-canadian-impact-1.6785459
Banks are in turmoil. Here's how Canadians might be affected
Financial tremors in U.S. and Europe bring back memories of 2008's crisis
The collapse of Silicon Valley Bank (SVB), followed by the near-death of two other regional institutions — First Republic and Signature Bank — left market-watchers jittery and fearful of a domino effect like the one that led to the global financial crisis of 2008.
And that was before Credit Suisse — one of the biggest banks in the world, safely housed in Switzerland of all places — came crashing down last week. What do these financial tremors mean for Canadians?
What happened? And why?
Silicon Valley Bank, First Republic Bank, Signature Bank and Credit Suisse all faced different problems made worse by rising interest rates.
But the common thread was lack of confidence, says Pedro Antunes, chief economist at the Conference Board of Canada.
Banking is built on confidence. If depositors lose faith, panic and rush to withdraw their assets from a bank for fear of its failure — it can lead to a bank run, as with SVB.
Sometimes, the panic spreads — often, Antunes told CBC News, by social media. Regulators around the world are now trying to contain the spread to prevent the collapse of additional banks.
Have we seen this before?
Lawmakers such as U.S. Treasury Secretary Janet Yellen have pushed back on the idea that these incidents echo the onset of the global financial crisis of the late 2000s. SVB's failure was the largest collapse of a U.S. banking institution since Washington Mutual — among many others — went under in 2008.
Shortly after longtime rival UBS agreed to buy Credit Suisse, central banks around the world — including the Bank of Canada — said they would intervene by offering cash and other support to banks, again in hope of halting the spread of failure and stabilizing the market.
Similar measures were taken in 2008. But this is not a repeat of that crisis, says Karl Schamotta, chief market strategist at Toronto global payment company Corpay.
"Things are far more regulated today," Schamotta said, though there are concerns about a slowdown in economic growth.
"The issues that caused the 2008 crisis — massive derivatives use, lots and lots of exposure to the U.S. housing market — those are not present this time around."
How does this affect Canada?
Canadians don't have much to worry about, according to Schamotta, because our banking system is "far more secure, far more diversified and far more regulated," than those of the U.S. or Europe.
"So this is an issue that is probably most important from a psychological perspective, less important in terms of your bank deposits," he said.
The 2008 crisis was a global disaster, said Antunes, "but most of Canada's banks did quite well through that. In fact, they came out quite strong."
"I think that's still very much the story. We have a different banking system," that's less competitive and easier to backstop than in the U.S., he said.
But as concern grows about a possible hit to the global economy, business investors "will be more prudent," said Antunes. And such investments are important for driving economic activity and Canadian trade.
Likewise, we could see a "tightening" of lending standards around the world, says Stephen Brown, deputy chief North America economist at the research firm Capital Economics.
Banks might not be willing to lend as much money or invest in equity bonds, according to Brown. That could change investing patterns, which in turn could impact the growth of global and U.S. GDP — and the Canadian economy by extension.
"Weaker GDP growth in the U.S. in general doesn't bode well for Canadian exports," added Brown.
"So these are all reasons to think that the Bank of Canada in particular probably isn't going to be forced back to resuming interest rate [hikes] and probably will be cutting rates again before the end of the year."
Will this lead to a recession?
A recession was predicted in Canada for 2023, and recent events could lead to a slightly deeper dip in economic activity, said Antunes. However, any potential recession will differ from past slumps because the current slowdown is coming with few job losses, as employment continues to trend upward.
"This recession is going to be very, very different for most households in Canada, because we're in a situation where the labour market is very much a big shock absorber," he said.
Schamotta says Canada and the worldmight enter a recession in the months ahead, as the effect of interest rate hikes "hits the bottom line for households and for businesses around the world."
"Retail sales, employment, factors like that will tell us about the health of the Canadian economy, about whether Canadian households are cutting their spending and reducing how much they put into the economy," he added.
"All of those things are going to contribute to whether we have a recession."
Front Burner 26:46 ABOUT THE AUTHOR
With files from Peter Armstrong, Laura MacNaughton and Reuters
1369 Comments
Canadian banks are where the US banks were in March 07. Most Americans didn’t think a American banking crises would happen within 18 months so I can see why your so far in the dark
The cause in the US in 08 was teaser rate mortgages (variable rate mortgages) which Canada has tonnes of now. About 24% of all Canadian mortgages are variable/teaser rates.
What happened last week on two US bank was ABCP but that’s much less risk than what happened to Swiss bank or what happened in 08
You might be able to travel around Canada more via greyhound but internationally it’ll costs you way more in Canadian dollars as the loonie is plummeting against all major currencies. Enjoy all your road-trips in Canada.
The dividend going into Drip will drop to in the following years. Keep buying the bank stock dips since they’ll continue for quite a while. Hope your not crying too hard m about them in a year or two if your actually investing in them lol
Nope, exclusively international travel. Exchange rate doesn’t bother me because of all the money I make from my bank stocks. Dividends at Canadian banks have never decreased, only increased. Even through times off turmoil which isn’t these days. Probably going to increase dividends more than usual for the next couple of years.
Sorry TD bank is down 14% in last month and at a 1 year low. Guess it’s skyrocketing in your eyes lol
Once you understand the difference between up and down there might be a proper business conversation possible with you
Oh, a one year low? The horror. You mean it dropped to where it was just last year? So not the lowest in a decade or anything?
Dropping because of an irrational market is a great buying opportunity.
Peter I’m sure you think the govt will bail them out
Our organization just spent a considerable amount of time teaching OSFI about the risks with climate change etc. and they still do not get it. OSFI did a presentation on Monday and spoke in general terms lifting messages from previous other documents that spoke about things like the Board needs to understand climate risks. Its a joke
Freeland needs to overhaul this mess
Freeland doesn’t understand the difference between loose spending and tightening spending and tightening lending.
SVB was running their business with a philosophy first and profits second. It turned out real well.
They made bad decisions, and were caught with their pants down when interest rates went up. The Fed kept saying that inflation was "transitory", then realized, "holy cow inflation isout of control!", and jacked up the rates, causing SVB's unrealized liabilities to make them insolvent. But OK, let's just blame "wokeness", it's easier to understand.
Green.
Methinks many would agree that the true blame belongs to all the political lawyers operating within the banking systems N'esy Pas?
What a ridiculous irresponsible headline. Why doesn't the cbc just ask people to start a run on the banks.
Most people are too lazy to walk to the bank, let alone run to it.
True I used my mouse to take my money out
How is the Biden presidency working out for all you fans?
That's great.
There are no Biden fans, just Trump haters and Trump lovers.
I think you're right. I can understand American voters being polarized around the guy, but Canadians?
Crazy.
There are no Canadians, just pseudo Americans with Canadian passports... well except for Gordon Lightfoot, he's Canadian.
I suppose you're right. We all watch American television and huddle around the border.
And to be fair, we are all polarized about our leader, Justin Bieber.
I am a Biden fan...
OK, Name one good thing about him?
Trump was bad.
I good thing about Biden? He isn't Trump.
That was my original point. I'm glad you understood.
At least I did and agreed
Hypothetically, if my checking account is overdrawn and TD bank goes belly up, do I still have to pay them back? Hypothetically of course, I would nnneeevvvverrr run an overdraft, say due to drinking at the local bar every night. Never, never, never.
Yes and No
"Banks are in turmoil." No they're not....They're avoiding turmoil...mostly successfully, by the way. This sensationalist, American style of journalism has to stop. We deserve (and pay for) better.
Well said !
Well they are "trying" to avoid turmoil.
I said the same thing that this site writes about fear and this issue is nowhere close to 2008 and of course they did not allow it.
It is actually CBC trying to avoid turmoil with said sensationalist headlines that draw clicks... Sad but the road we are driving.
There is no such thing as news anymore. Every single headline is AI generated to maximize click through with no concern for dignity.
Proof? Social media nonsense?
So you work in mainstream media, ie this news outlet, and have personal knowledge of this?
Complete nonsense ... give me proof. Do you work for a REAL news outlet? Is that coming from personal experience? No? Thought so...
Dream on
Turmoil - "a state of great disturbance, confusion, or uncertainty." That's not the banks, that's my life.
That is the story of my life
A market like 2008 is needed, we need to see fuel prices plummet along with food prices.
It’ll just hit Canada way harder than the US and most of the world this time around compared to the opposite 15 years ago
2008 was great for me. I paid off all of my debt using 0% teaser rates. The trick is to maintain employment. Which as I look around this room, won't be too difficult for me.
I concur
Why work?
Canadian Banks are not in Turmoil.
It's true, this is about American banks. I'm here since they allowed comments and these type of articles usually bring all the Loonies. It's so much fun.
Most people here cannot make change at a lemonade stand but they understand International Economics. Cheap entertainment. :)
That's true and Canadian Lemonade stands are better regulated than American Banks.
Would we know if they were?
Still have all my money.
Nope
24% of Canadian mortgages are variable rate where most Canadians are telling the banks I can’t handle the extra $2 or $3 k a month in interest or even $200 more s month. Canadian Banks aren’t forcing people to pay interest on mortgages just like US banks did in 07.
A lot of these mortgages are backed up by the CMHC or rally the federal government or at the end of the day the ‘Canadian taxpayers’
Also Canada has the highest household debt to income ratio in the world and corporate debt in Canada per capita is way higher here than the US