By Joel Kranc

In a somewhat surprising turn of events, announcements from U.S.-based Silicon Valley Bank and Signature Bank and Swiss investment bank Credit Suisse signalled to investors around the world that cracks were forming in the regional and global banking system.

Higher interest rates and proclamations of mismanagement by banks that catered to tech and venture capital firms helped bring these U.S. regional banks down. In the case of Credit Suisse, missteps and compliance failures, as well as an announcement that its biggest backer, the Saudi National Bank, was no longer prepared to put up money after buying a near 10% stake in the company a year ago, hastened its troubles.

In Canada some of the largest banks felt the effects of global banking troubles as stocks initially sold off. However, the Canada Deposit Insurance Corporation (CDIC) began reviewing limits to safeguard the country’s financial system.

In a statement, the Canadian Bankers Association said, “Canada’s banks are well-capitalized with robust capital ratios, have diversified business models and funding sources, and must meet rigorous liquidity standards set by federal regulators. The Canadian banking system is widely recognized for its prudent lending and risk management practices, diligent government oversight, and sensible regulation based on the core tenets of safety and soundness.”

Others agree. Neil Parmenter is a senior counsel with Global Public Affairs and a former president of the CBA. “A financial crisis in the United States inevitably raises questions about the ability of the Canadian banking system to withstand a similar situation,” he says. “Despite concerns this event may impact the Canadian economy, Canada’s strong banking sector and the regulatory bodies that underpin it provide assurances against the prospects of broader contagion in Canada. The diverse asset base of Canada’s banking industry coupled with the world’s premiere regulatory system limits systemic risk in Canada.”

He further states that, “There were many factors at play with SVB, but their long-term bond strategy and holdings were largely responsible for their liquidity event when depositors prompted a run on the bank. In many ways, SVB’s 40 year run tells the story of Silicon Valley itself — an impressive run in a high growth sector but when the world pivots, the headwinds can sink the ship almost overnight.”

What of the largest Canadian pension systems as investors who may have exposure or be susceptible to large swings in the financial sector? There is relatively good news on that front. A Morningstar DBRS report says that Canadian pension funds (including the CPPIB, PSPIB, CDPQ, OTPP, OMERS and OPB) have strong governance practices and guidelines to identify, monitor, and evaluate all types of risks, including emerging risks on their portfolios. While the situation continues to be assessed, they have identified the following:

  • Direct exposure: None of the pension funds had any material direct exposure through equities or other type of securities to Credit Suisse, SVB, or Signature Bank.
  • Some of them identified very small exposures through public equities, index derivatives, and external managers.
  • A small number of the pension funds held negligible amounts of Credit Suisse AT1 bonds.
  • Indirect exposure: Similarly, none of the pension funds had any material indirect exposure via their portfolio companies to Credit Suisse, SVB, or Signature Bank. Although some portfolio companies had deposit accounts with the collapsed U.S. banks, the Federal Deposit Insurance Corporation announcement to protect all deposits from both banks, including amounts above the USD 250,000 standard limit, will eliminate any risk of losses.

The report concludes that “continued widespread stress in the financial sector could tighten credit conditions for consumers and businesses, adding more uncertainty to the already challenging investment environment, which could affect the pension funds’ financial performance.”

It notes a combination of discipline and strong frameworks in place at pensions funds that set limits across various metrics, “which translate into highly diversified portfolios with reduced exposure to any individual investment.” This has resulted in an average 10-year investment return of between 7.5% and 10.8%, according to Morningstar, which also notes that  “Updates to policies, procedures, risk management, and crisis management have also improved based on experience gained from the 2008 financial crisis.”