Response to U.S. Banking Concerns

Given the recent news about the failure of Silicon Valley Bank and Signature Bank in the United States, we wanted to provide some comfort about your investment accounts with TriDelta Investment Counsel Inc.  The reason we can provide this comfort is due to the much larger and more diversified banking system in Canada, and the fact that your investments are also regulated and held outside of the bank.

As a start, the Canadian banking system is Federally regulated and is known globally for its conservative regulatory environment. Bank deposits are regulated by The Office of the Superintendent of Financial Institutions (OSFI), with additional oversight by the Bank of Canada. Since the Great Financial Crisis of 2008/2009, banks are better capitalized than in the past, and are generally, better able to withstand losses.

Having said all of this, your investment deposits are separate and legally distinct from the bank.  In the case of problems with the banking system, this is a good thing.  They are custodied/held at National Bank Independent Network (NBIN).  This is regulated by IIROC, The Investment Industry Regulatory Organization of Canada.   Your investments at NBIN are also covered by the Canadian Investor Protection Fund (CIPF) in the event of bankruptcy, of up to $1 million (with up to $100,000 for cash holdings).

While there can always be risks in the banking system, there are a few factors that make the United States a much higher risk than Canada.  For starters, between 2001 and 2023 the U.S. had 562 bank failures according to the Federal Deposit Insurance Corporation (FDIC), while Canada had zero.

The key differences would be:

  1. Canada has a much smaller number of large banks.  These banks have a broad and diversified customer base.  In the United States, there are many smaller banks that are more concentrated by geography and industry.  This leads to increased risks if there is a particularly bad economic environment in a particular industry.
  2. While Canadian banks can invest their holdings in a variety of ways, they are more often invested in shorter term bonds and mortgages than their U.S. counterparts.  This is in part due to the overall bond market in Canada vs. the U.S., but also a strong risk management culture in Canada.  This is important because short term notes do not move up or down as much as long term notes when interest rates change.  Given the meaningful increases in interest rates, it has caused greater losses in long term bonds and mortgages.  In the case of Silicon Valley Bank, they had a very high percentage of their investments in longer term bonds.  When they were forced to sell them to cover demands for cash from depositors, they were forced to ‘realize’ large losses.

When you understand the different banking environment, culture and regulatory structure in Canada vs. the United States, and then combine that with the fact that your investment accounts are legally separated from the banking assets, you should have comfort that we are largely protected from the banking issues in the United States.  This doesn’t mean that there are not economic risks from these bank defaults, but the current aggressive steps of the U.S. Federal Reserve, the U.S. Treasury, and the U.S. Federal Deposit Insurance Corporation have likely prevented a contagion from happening – and have ensured that customers of both the Silicon Valley Bank and the Signature Bank, with $325 billion in combined deposits, have access to all of their funds.