Expanding on the communication we sent out late last week, we wanted to provide some perspective on why the collapse of SVB is unlikely to happen within the Canadian banking system to provide greater piece of mind to anyone pondering the implications to our banking system. The comments below are summarized from reports and conversations we’ve had with a number of our research providers.

• This is not a repeat of 2008: We believe the failure of SVB was in part driven by firm specific risk, specifically their failure to manage interest rate risk, specifically the mismatch in duration between the bank’s assets (e.g., bonds) and its liabilities (e.g., customer deposits). On the other hand, 2008 was a widespread failure to manage credit risk resulting in part from aggressive and sometimes fraudulent mortgage lending practices. To be clear, there are no toxic assets at play here (i.e. those of unknowable credit quality) as there was in 2008.
• Canadian bank funding sources are well diversified: SVB's deposit base was narrowly concentrated on uninsured deposits from the Tech/VC/PE ecosystem in California. Moreover, fewer than 5% of SVB's deposits were less than US$250k, which created high flight risk for the uninsured deposits. Canadian bank funding's are much more diversified across retail deposits, commercial deposits and wholesale funding (see chart below). Diversified deposits (both by source and geography) leave Canadian banks less exposed to the risk of significant draw-down in deposits in short order.

Source: RBC investor relations, 1Q/23 results

• Canadian bank assets are diversified: 55% of SVB's assets were invested in securities, including long duration Treasuries, that came under pressure from higher rates. Canadian bank assets are more diversified across residential mortgages, retail loans, wholesale loans and securities. The chart below highlights diversification of RBC's assets, which are predominantly driven by wholesale and retail loans.

Source: RBC investor relations, 1Q/23 results

• No material direct exposure to SVB: As per RBC Capital Markets, “We do not believe Canadian banks have a material direct exposure to SIVB or many of the other smaller U.S. banks, so impacts may be limited to second and third derivative effects”.
• Canadian banks are subject to stringent liquidity ratios: SVB was exempt from the Liquidity Coverage Ratio (LCR) requirement, given its size (<$250bn in assets). As a reminder, LCR ensures that a bank can meet up to 30 days of cash outflows during a period of stress using high-quality liquid assets that can be sold at little to no loss. The minimum LCR requirement is a 100%, and Canadian banks most recently maintained LCR ratios well above these levels. See chart below.