Anyone who follows finance, and even those who don’t, have probably heard about the March 2023 Silicon Valley Bank (SVB) bank run. The failure of SVB marks the largest U.S. bank failure since 2008. The alarming news has left many of us wondering if our own banking institutions are at risk of a Canadian bank run.
Silicon Valley Bank was founded in 1983 and grew to become America’s 16th largest bank. It was an important bank in the tech industry, working with many venture capitalist (VC)-backed tech startups. On March 8th, SVB announced its plan to sell $2.2 billion in shares to keep up with increased cash withdrawals from its startup customers. Fearing that the bank lacked liquidity, people immediately scrambled to withdraw as much cash as possible. Within two days, SVB’s share sale was cancelled, and U.S. regulators took control of the bank.
So, what happened? This phenomenon is known as a “bank run” or “run on the bank.” When a large group of depositors all withdraw their money at the same time, banks risk using up their cash reserves. Worrying that the bank will become insolvent, more customers rush to withdraw their money, and banks can end up without enough cash to cover withdrawals. Read on to learn all about bank runs, the history of Canadian bank runs, and the likelihood of a Canadian bank run happening today.
Canadian bank run history
Canadian bank runs and bank failures are rare but not unheard of. The most recent Canadian bank run happened in 1996 when the Calgary-based Security Home Mortgage Corporation failed. The failure affected roughly 2,600 Canadians and $42 million in deposits. The corporation closed its doors, and customers were alarmed when they found out they could not immediately access their savings.
In the U.S., the history of bank runs is much richer. Notably, over 300 banks failed during the 2008 financial crisis and the years shortly after. SVB is now the second-largest bank failure in American history. The first largest took place in 2008 when Washington Mutual collapsed. During this infamous bank run, depositors ran to withdraw $16.7 billion over nine days. As a result, Washington Mutual was left without sufficient funds, and federal regulators intervened and sold the bank to JP Morgan.
Will a run on the bank happen in Canada?
Canada’s economy is highly attuned to changes in the United States. So, when we hear about a major financial event happening in the states, it’s natural to wonder if or expect a similar event will occur in Canada. While it’s impossible to say for sure, we do know that the SVB bank run was a unique situation that is highly unlikely to be repeated in Canada. Experts agree that Canadians have no cause to worry right now. Several bank representatives and economists have also been quick to reassure Canadians of the security and resiliency of Canada’s banking model. In fact, Canada’s model is generally regarded as one of the most secure in the world.
Protection against Canadian bank runs
Thankfully, Canadians are much less at risk of a run on the bank than our American neighbours. Canadian banks are subject to strict stress tests and liquidity standards. The Canada Deposit Insurance Corporation (CDIC) protects all eligible deposits at member institutions, including all the major Canadian banks and over 80 banks and credit unions in total. The CDIC is a federal Crown corporation established in 1967 to protect Canadians’ deposits in case of a bank failure. CDIC coverage protects eligible deposits up to $100,000. That includes chequing and savings accounts, RRSPs, RESPs, and more. CDIC coverage is free and automatic.
Since the CDIC’s establishment in 1967, there have been 43 instances of financial institution failures. The CDIC has resolved them all, and it has helped over 2 million depositors protect their money. According to the CDIC, not a single dollar of insured deposits has been lost. Canada also has other regulating bodies that work to prevent bank runs, including the Office of the Superintendent of Financial Institutions (OSFI) and the Bank of Canada.
How to know if you’re protected
All major Canadian banks and other federally regulated trust and loan companies are required to be CDIC members. Your eligible deposits at all of these institutions are automatically covered. You can check the CDIC website for a full list of their member institutions. CDIC does not apply to foreign banks, such as AMEX, or services like PayPal.
In the event of a hypothetical Canadian bank run
A run on the bank is possible in Canada, although we have not yet experienced one on the same scale as the United States. In the event of a major Canadian bank run, we’ve already established that the CDIC would cover up to $100,000 of all eligible deposits. If a run on the bank were to happen at one of Canada’s “Big Six” banks, OSFI and the Bank of Canada would likely also provide assistance. The bank may be taken over, but operations would continue.
How are Canadian bank runs different from the U.S.?
According to Canadian experts, a situation like the SVB bank run is highly unlikely to occur in Canada. Canadian banks generally have more regulation, such as stress tests on rising interest rates and third-party reviews. The U.S. also has a much higher number of small and medium-sized banks, which are subject to less regulation. In contrast, banking in Canada is concentrated in a small group of highly-regulated major banks. These large banks have a much lower risk or virtually no risk of failing.
Canada’s banking system has withstood the test of time and numerous eras of economic uncertainty. For example, during the 2008 financial crisis, the U.S. experienced several bank failures, while Canada had none.
Stricter regulations for American banks were enacted following the financial crisis, but they were rolled back in 2018. Before 2018, banks with assets over $50 million were considered “too big to fail” and were subject to stricter regulations. In 2018, the threshold was raised to $250 billion, meaning any bank with assets under $250 billion is now considered “small” and subject to looser requirements. Many economists point to this change as a contributing factor to SVB’s failure.
Canadian bank run takeaways
A Canadian bank run can and has happened. At the end of the day, no Canadian bank, no matter how large, is immune to a bank run. Luckily, for the most part, Canadians’ deposits are well-protected, and numerous safeguards are in place. While it can be alarming to hear about a catastrophic run on the bank in the United States, Canadians have no immediate cause for alarm. Remember that CDIC coverage applies per account, so if you want to protect more of your deposits, you can take precautions like opening multiple accounts. And if you’re curious, you can always ask your bank about the protections it has in place.
FAQ About Canadian Bank Runs
A bank run is when a large group of depositors withdraw their money simultaneously, risking a bank’s cash reserves. Once a run on the bank starts, more customers rush to withdrawal their money, and banks can end up without enough cash to cover withdrawals.
A bank run can happen for many reasons. Ultimately, it comes down to depositors losing faith in their financial institutions. When people worry that their bank will not be able to provide cash on demand, they rush to withdraw as much as possible to avoid losing access in the future. The paranoia from fellow customers only adds fuel to the bank run fire. Often, a bank run will be triggered by an announcement or breaking news. For example, Silicon Valley Bank announced that it faced a lack of liquidity, which spooked its customers into action.
Yes, many types of Canadian deposits are protected from a bank run. In Canada, the Canada Deposit Insurance Corporation (CDIC) protects all eligible deposits at member institutions, including all the major Canadian banks. CDIC coverage is free and automatic. It protects eligible deposits up to $100,000. That includes chequing and savings accounts, RRSPs, RESPs, and more. If your bank were to fail, the CDIC would reimburse up to $100,000 per eligible account.
A bank run is possible at any Canadian bank. However, Canadian banks are highly regulated to avoid this possibility, and the CDIC protects Canadians’ deposits. In the event of a bank run at one of Canada’s Big Six banks, other federal regulating bodies, such as the Office of the Superintendent of Financial Institutions (OSFI), would likely intervene to keep the situation under control.
The last Canadian bank run happened in 1996 at the Calgary-based Security Home Mortgage Corporation. Security Home Mortgage Corporation’s failure affected roughly 2,600 Canadians who were unable to immediately access their savings. There have been 43 instances of financial institution failures since 1967, affecting over 2 million depositors.