Good morning,

We have been receiving questions on the stability of deposit for the banks in Canada given the recent fallout of Silicon Valley Bank (SVB). The RBC Portfolio Advisory Group address key attributes as to why the Canadian Banks are different in the following points below.

• 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 is 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.
• Canadian bank assets are diversified: The fallout of SVB was in part driven by a mismanagement of interest rate risk as SVB mismatched the duration of its long-term Treasury bonds with its sizeable demand deposits from a concentrated funding base. Approximately, 55% of SVB's assets were invested in securities, including long duration Treasuries, that came under pressure from higher than expected interest rates. Canadian bank assets are more diversified across residential mortgages, retail loans, wholesale loans and securities.
• No material direct exposure to SVB: Per RBC Capital Markets, following their conversations with bank management teams, “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”.
• Non-viability contingent capital (NVCC) provides another layer of protection: A significant regulatory feature worth noting is the introduction of bail-in debt for all senior unsecured bonds issued by large Canadian banks from 2018 on. With the introduction of bail-in, the vast majority of large bank capital structures can be force converted into equity if capital ratios become significantly impaired and more traditional methods of raising capital have failed. This approach, which is prescribed in advance of a crisis, provides an additional layer of clarity in how a liquidity-induced capital shortfall scenario could play out. Given the majority of non-deposit liabilities could be rolled into equity, this presents a very large source of accessible capital that would require no external demand from investors. Bail-in debt is not a part of the capital structure for credit unions or smaller banks.
• 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.

In response to the fallout of SVB, the Federal Reserve is weighing tougher regulations for midsized banks following the collapse of two lenders that forced government authorities to intervene. The U.S. central bank has stated that it will review the capital and liquidity requirements alongside stress tests carried out annually on financial institutions, especially those with assets between US $100 billion and US $250 billion, to further evaluate and reassess lenders’ ability to withstand market stress.

Please continue to call us with any questions that you may have as our entire team stands ready to listen and speak with you. We can also be made available to speak with any friends or family members who may need reassurance during these times.

Have a great day,

Devin