Financial tremors in U.S. and Europe bring back memories of 2008's crisis
All eyes are on the global banking sector after sudden turmoil brought down or threatened a handful of U.S. banks and one major European bank this month.
The collapse of Silicon Valley Bank (SVB), followed by the near-death of two other regional institutions — First Republic and Signature Bank — left market-watchers jittery and fearful of a domino effect like the one that led to the global financial crisis of 2008.
And that was before Credit Suisse — one of the biggest banks in the world, safely housed in Switzerland of all places — came crashing down last week. What do these financial tremors mean for Canadians?
What happened? And why?
Silicon Valley Bank, First Republic Bank, Signature Bank and Credit Suisse all faced different problems made worse by rising interest rates.
But the common thread was lack of confidence, says Pedro Antunes, chief economist at the Conference Board of Canada.
Banking is built on confidence. If depositors lose faith, panic and rush to withdraw their assets from a bank for fear of its failure — it can lead to a bank run, as with SVB.
Sometimes, the panic spreads — often, Antunes told CBC News, by social media. Regulators around the world are now trying to contain the spread to prevent the collapse of additional banks.
Global central banks band together to prevent crisis
Global central banks have banded together to reassure world markets and prevent the spread of the banking crisis that started with the collapse of two regional U.S. banks earlier this month from spreading.
Have we seen this before?
Lawmakers such as U.S. Treasury Secretary Janet Yellen have pushed back on the idea that these incidents echo the onset of the global financial crisis of the late 2000s. SVB's failure was the largest collapse of a U.S. banking institution since Washington Mutual — among many others — went under in 2008.
Shortly after longtime rival UBS agreed to buy Credit Suisse, central banks around the world — including the Bank of Canada — said they would intervene by offering cash and other support to banks, again in hope of halting the spread of failure and stabilizing the market.
Similar measures were taken in 2008. But this is not a repeat of that crisis, says Karl Schamotta, chief market strategist at Toronto global payment company Corpay.
"Things are far more regulated today," Schamotta said, though there are concerns about a slowdown in economic growth.
"The issues that caused the 2008 crisis — massive derivatives use, lots and lots of exposure to the U.S. housing market — those are not present this time around."
How does this affect Canada?
Canadians don't have much to worry about, according to Schamotta, because our banking system is "far more secure, far more diversified and far more regulated," than those of the U.S. or Europe.
"So this is an issue that is probably most important from a psychological perspective, less important in terms of your bank deposits," he said.
The 2008 crisis was a global disaster, said Antunes, "but most of Canada's banks did quite well through that. In fact, they came out quite strong."
"I think that's still very much the story. We have a different banking system," that's less competitive and easier to backstop than in the U.S., he said.
But as concern grows about a possible hit to the global economy, business investors "will be more prudent," said Antunes. And such investments are important for driving economic activity and Canadian trade.
Likewise, we could see a "tightening" of lending standards around the world, says Stephen Brown, deputy chief North America economist at the research firm Capital Economics.
What does the Silicon Valley Bank collapse mean for Canada?
Karl Schamotta, chief market strategist for Corpay, says the collapse of Silicon Valley Bank could mean a 'turbulent' time for Canadian investors.
Banks might not be willing to lend as much money or invest in equity bonds, according to Brown. That could change investing patterns, which in turn could impact the growth of global and U.S. GDP — and the Canadian economy by extension.
"Weaker GDP growth in the U.S. in general doesn't bode well for Canadian exports," added Brown.
"So these are all reasons to think that the Bank of Canada in particular probably isn't going to be forced back to resuming interest rate [hikes] and probably will be cutting rates again before the end of the year."
Will this lead to a recession?
A recession was predicted in Canada for 2023, and recent events could lead to a slightly deeper dip in economic activity, said Antunes. However, any potential recession will differ from past slumps because the current slowdown is coming with few job losses, as employment continues to trend upward.
"This recession is going to be very, very different for most households in Canada, because we're in a situation where the labour market is very much a big shock absorber," he said.
Schamotta says Canada and the worldmight enter a recession in the months ahead, as the effect of interest rate hikes "hits the bottom line for households and for businesses around the world."
"Retail sales, employment, factors like that will tell us about the health of the Canadian economy, about whether Canadian households are cutting their spending and reducing how much they put into the economy," he added.
"All of those things are going to contribute to whether we have a recession."
In the last two weeks, four banks in the United States and one in Europe have either found themselves teetering on the brink or completely collapsed. In response, other private banks and governments all over the world have rushed to try to contain the potential financial contagion. On Sunday, the central banks of Canada, the US, Asia and Europe all agreed to increase money available, which in turn would help banks lend more to each other so they can stay afloat. Today on Front Burner, we are talking to Canadian Jim Stanford. Just how bad this financial crisis could get? How comparable will it be to the 2008 recession? And will this mean for the average Canadian? For transcripts of this series, please visit: https://www.cbc.ca/radio/frontburner/transcripts
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