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Canada’s Big Six banks have lost billions of dollars in market capitalization in the wake of the global banking crisis, according to DBRS Morningstar, but the company says the sector is well positioned to navigate the volatility.
The fall of Silicon Valley Bank and Signature Bank, as well as the latest distress at Credit Suisse, has investors questioning the stability of the global banking industry, and that sentiment has caused the leading Canadian banks to lose $57 billion in market capitalization over past two weeks, the DBRS report revealed on Monday. Despite this financial blow, it stated that Canada’s banking sector is well positioned to handle the market chaos, and absorb further losses if necessary.
“The Canadian banks generally have a lower exposure to fixed-income securities, diversified and stable funding, sufficient liquidity, prudent risk/liquidity management, and capital buffers that should enable Canadian banks to navigate current market turbulence,” it said.
The report also revealed that a run on Canadian banks is somewhat less likely to happen compared to their counterparts in the United States. This is because there are only 85 banks in Canada that have deposit protection compared to the 4,700 U.S. banks, DBRS Morningstar stated. In addition, Canadian banks are less exposed to riskier investments within the tech and oil and gas sectors, compared to American banks, it added.
Another factor supporting the Canadian banking sector through future turbulence is the ability to manage an increase in unrealized losses, the findings showed.
During the pandemic, the banks experienced a period of outsized deposit growth, and some of these deposits were invested in low-credit-risk vehicles, the report revealed. As interest rates have climbed, Canadian bank’s investment portfolios have seen an increase in unrealized losses. However, these portfolios are usually a smaller percentage of total assets, and the banks have a history of asset and liability matching as well as interest rate hedging, making them well-positioned to absorb these potential losses, the report explained.
Unrealized losses can become an issue when the sale of securities is required amid a liquidity squeeze.
“We do not currently expect that the Canadian Banks will require premature sales of securities given their solid liquidity and funding profiles,” it stated.