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Mitigating Risk in the Canadian Banking Industry – And How It Differs From the US

Reading Time 3 minute read


Banking & Finance Bulletin

For many emerging technology companies, the collapse of Silicon Valley Bank has led to many questions around the differences between the Canadian and US banking systems. Are they really that significant? Do Canadian companies with deposits at Canadian financial institutions face the same risks as their American counterparts? We put together this primer to help answer some of those questions.

According to the Federal Deposit Insurance Corporation (FDIC), there have been 513 bank failures in the United States since 2009, including the two most recent US bank failures, Silicon Valley Bank and Signature Bank. Canada experienced no bank failures during that same time period. In Canada, the last deposit taking financial institution failure was in 1996 with the failure of Security Home Mortgage Corporation.

The Canadian Banking system is different from the system in the United States. Canada has 28 domestic banks compared to over 7,000 in the United States. Of the 28 domestic banks in Canada, the biggest six banks, Royal Bank of Canada, The Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, The Bank of Nova Scotia, Bank of Montreal and National Bank of Canada, have been designated as Domestically Systemically Important Banks (D-SIBs) and collectively control more than 85% of domestic assets. The D-SIBs are generally more diversified in their business lines as they are engaged in retail and commercial deposit taking and lending, investment banking and wealth management, among others.

Banks in Canada are regulated both federally and provincially, with the federal regulator, the Office of the Superintendent of Financial Institutions (OSFI) being responsible for all aspects of bank regulation, other than certain aspects of consumer protection. OSFI’s regulation includes prudential, governance and risk requirements and oversight. More specifically, banks in Canada are subject to capital, liquidity and leverage requirements set by OSFI, including being required to maintain certain levels of capital and capital buffers and liquidity. D-SIBs are required to maintain an additional capital buffer, known as the domestic stability buffer, which is currently set at 3% of the bank’s total risk-weighted assets. These requirements, among others, have helped to contribute to one of the safest and strongest banking systems globally, which was evident recently in 2008 when Canadian banks emerged relatively unscathed from the financial crisis as compared to the US and European banking sectors.

OSFI moved swiftly on March 12, 2023 to take control of the Canadian branch of Silicon Valley Bank and it has been reported that OSFI has reinstated a tool used during the COVID-19 pandemic to have a daily check in with the banks that it regulates on their liquidity levels. This allows OSFI to flag any immediate liquidity risks as a result of the current market environment and recent bank failures in the United States.

If you have any questions about what this all means for your company, or just need some pointers on how to talk about these issues around the board room, our emerging technology and banking teams would be pleased to help.

Fasken's Emerging Technology practice is comprised of 80+ dedicated legal professionals across the Canadian market. We're deeply involved in the startup ecosystem and have worked closely with founders from startup to scale up to exit. Our team is a leading Canadian law firm for venture capital (VC) financings and tech mergers and acquisitions (M&A) and act for many of the best in class start ups and scale up innovation based companies in Canada. Given this experience, we understand market trends and can assist in guiding companies forward as they scale – we take a wholistic and strategic approach to helping our clients achieve their goals and provide the full suite of services including corporate, corporate finance, M&A, commercial, intellectual property (IP), data and compliance, employment, tax and beyond.

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