Herewhatvoir Given the collapse of Silicon Valley Bank (“SVB”) and challenges at Credit Suisse Group AG, concerns about the global financial system challenged investor confidence. However, expectations for the US Federal Reserve Board (“Fed”) to make a smaller rate increase at its next meeting eased weakening investor sentiment. The S&P/TSX Composite Index declined over the week, while the S&P 500 Index advanced. Oil prices fell sharply in response to economic concerns. Yields on 10-year government bonds in Canada and the US ended lower.
Concerns remain over the strength of the global financial sector
The collapse of SVB sent waves throughout financial markets and resulted in concerns about contagion throughout the industry.
The US Treasury allowed the Federal Deposit Insurance Corporation to complete the resolution of SVB and protect all depositors.
Credit Suisse noted material weaknesses in its reporting as its largest shareholder refused to extend its capital. The Swiss National Bank stepped in and lent the firm US$54 billion, hoping to stabilize it through this period of weakness. (March 19 update: lending deal failed. Switzerland's biggest bank, Union Bank of Switzerland, has agreed to buy its ailing rival Credit Suisse in an emergency rescue deal.)
The European Central Bank raised its key interest rate by 50 basis points to 3.50%, while reiterating the European banking sector remained strong. The central bank is prepared to act should conditions deteriorate.
The global financial sector's struggles raised expectations for a relatively smaller rate increase from the Fed.
Signs of stability in Canadian real estate
Earlier in 2023, the Bank of Canada signaled its intention to pause interest rate increases, which may support demand in Canada's real estate market.
Sales of existing homes increased by 2.3% in February, while the benchmark home price fell 1.1%, the slowest pace of decline since March 2022.
Housing starts in Canada rose by 13.0% in February, its first increase in five months, suggesting builders may be getting more confident about the housing market.
The US inflation rate eases
The US inflation rate was 6.0% in February, moderating to its lowest level since September 2021.
February's slowdown was largely in response to easing price growth for food and energy.
Inflation remains high and broad-based. The core inflation rate was 5.5% in February.
The result puts the Fed in a difficult spot, given its goal to bring down inflation versus its role in helping to support the financial system amid the SVB collapse.
Chinese data pointing to improving conditions
Economic data from China may give reason to believe economic conditions are improving.
For the January to February period, retail sales rose 3.5% year-over-year, reversing three straight declines.
Over the same period, industrial production rose by 2.4% year-over-year.
Both improved compared to December as economic activity picked up amid easing lockdown restrictions and the Lunar New Year holiday.
*** March 20 Update: UBS Group is buying troubled rival Credit Suisse Group in an all-share deal worth US$3.25-billion, creating a global wealth manager with US$ 5 trillion of invested assets and ending a century and a half of independence for what was once one of the world’s mightiest investment banks and traders. The fast-track takeover, announced Sunday evening, reflected the desperation of governments and regulators for an agreement before the markets opened on Monday for fear that Credit Suisse’s alarmingly fast deterioration could trigger a crushing selloff, Eric Reguly reports. Globe and Mail
*** Key Facts to Know:
Strict regulations in Canada
First, it is important to note that the financial regulatory environment in Canada is stricter than in the United States. Canadian banks are also very well capitalized and are considered safe havens gave their strong deposit base and the regulatory scrutiny they are subject to.
In addition, unlike the U.S. regional banks affected by the bank run, Canadian banks are required to undergo what is known as "stress tests" and must meet rigorous capital ratios. These tests allow authorities to ensure that our financial institutions are robust and can handle various scenarios that could shake the economy, such as a sustained rise in interest rates.
This allows us to see in advance what the main impacts would be for each scenario and to prevent potential complications upfront.
There are over 4,550 regional banks in the U.S. that, in addition to being subject to more limited regulation, tend to specialize in certain types of assets and operate in more specific geographic areas. The Silicon Valley Bank, for example, focused its business primarily on the Californian technology industry.
The Canadian banking system however is dominated by a few large banks that are closely monitored by regulators. These banks are therefore required to have excellent asset diversification and balanced portfolios in terms of loan types and other financial assets. They must also be properly diversified both geographically and in the economic sectors they invest in. These requirements reduce their vulnerability to market fluctuations and to the effects of unexpected situations that might occur, such as the collapse of Silicon Valley Bank.