Let’s be clear, Canadian banks are not technically bankrupt.
“Absolutely not,” replies BMO strategist Stéphane Rochon.
The question nevertheless deserves to be asked. And is particularly relevant in the current context of turbulence caused by the failure of American banks, in particular the recent case of the Silicon Valley Bank.
If he nevertheless finds the question a bit alarmist, and the situation hypothetical and rather improbable, Stéphane Rochon admits that there are investors who are panicking at the moment in the market. The strategist recalls, however, that in Canada, deposits are guaranteed by the federal government.
“We are very far from the financial crisis,” he said.
Banks can issue bonds, preferred stocks, very short-term securities (commercial paper, in other words), etc.
If people decided to withdraw their money to put it under their mattress, it would not jeopardize the viability of the banks’ business model. But it would hurt them because their financing costs would increase, says Stéphane Rochon. “Deposits are the cheapest form of funding for banks. It would therefore hurt from the point of view of profitability. Canadian banks would nonetheless remain profitable. »
The Canadian government is certainly happy to be able to count on a solid financial system. There are six major banks in the country, the Mouvement Desjardins, and a few smaller institutions, such as Laurentienne and the Canadian Western Bank, for example.
According to this expert, Ottawa could act if necessary if there were to be a wave of panic. “You could just take the example of the Fed or the US Treasury Department during the financial crisis,” he says.
“Systemically important US banks were forced to take 10 billion in capital to restore confidence. It could be something similar. It could be an additional injection of capital through the Bank of Canada or the Government of Canada one way or another to ensure the viability of the banks. There are ways to do that. »