What can clients learn from Silicon Valley Bank collapse?

When it collapsed last Friday, Silicon Valley Bank (SVB) was the 16th largest U.S. bank and largest bank for tech start-ups. Its demise sent shockwaves through global markets, prompting a sell-off of bank stocks worldwide and some of the largest rallies in government bond prices since 2008. While the U.S. Treasury Department and Federal Deposit Insurance Corporation (FDIC) quickly stepped in to ensure depositors did not lose their money, it still left many skittish about their financial safety.

“I think this is going to be something that causes clients to think twice about the strength of their financial institution. They’re going to be asking questions going forward to ensure that we have a stronger system,” said Davidson, whose team sent clients a note this week, but received few calls.

While this situation might be reminiscent of 2008, he said there are some key differences. The system responded to the failure much faster this time, developing a plan and taking control of the bank within three days. The banking sector’s capitalization in both Canada and the U.S. has also improved since 2008, so there is less leverage and banks are better managed now. They don’t have the same risks they had then.

Even though the Canadian banks’ stocks took a small hit, he noted that there is not the same concern about them as there is about the numerous regional U.S. banks. In fact, this situation may allow Canadian banks with strong U.S. businesses – BMO, RBC, and TD – to help the technology companies that were impacted by SVB’s failure.

“In Canada, the capital ratios for the banks went up last year. They’re expected to move up again this year. They were already at a very conservative level, so there’s really no concern from that standpoint,” said Davidson.

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