As the millionaire depositors in Silicon Valley Bank got all their money back courtesy of a U.S. government agency, there were no doubt sighs of relief among those bank customers who would otherwise have taken a severe financial beating.
Until the U.S. government swooped in Monday, that included the vast majority of deposits at SVB, which catered to Silicon Valley startups and venture capital firms. Deposits over $250,000 US are uninsured by the Federal Deposit Insurance Corporation or FDIC.
Even the conservative-leaning Wall Street Journal, harking back to the hundreds of billions of dollars handed out following the 2008 banking meltdown, is debating whether the support for uninsured depositors in the second largest bank failure in U.S. history should be declared “a bailout.”
One concern is “moral hazard,” the concept that by handing out money to people who should have lost it in a free-market transaction means they will be reckless in future, and maybe their banks will be more reckless too.
But that is only one among many financial considerations suddenly altered by the unexpected capitulation of the pre-eminent banker to California startups.
Perhaps the biggest question raised by the collapse that has led to a ripple of selling across the global markets, including Canada, is why didn’t we see this coming? Added to that is the question what other unexpected fallout there could be as the world contends with inflation and higher interest rates?
U.S. bank failures leave Canada’s tech sector shaken
The bank failures in the U.S. have sent shockwaves north, rattling the Canadian tech sector. Depositors have rushed to get their money out, but there’s a broader fear it will chill investment.
Bank shares stumbled
Libertarian ideologues in the venture capital community who might have quoted Ronald Reagan’s famous bon mot, “The top nine most terrifying words in the English language are: I’m from the government, and I’m here to help,” may turn down the money.
The U.S. Federal Deposit Insurance agency that effectively took over the assets of the failed bank moved quickly, announcing on Sunday that all insured depositors would have immediate access to their cash. By Monday it said uninsured depositors, those with more that $250,000 US, would also get their money back. But they said taxpayers would not be on the hook.
“Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law,” said the Monday FDIC release.
Despite that quick action, bank shares around the world declined.
The Canadian Big Five were down between two and four per cent as the day began although they recovered most of their losses later in the day. Some smaller U.S. banks were hit harder as the FDIC and the U.S. government said its decision to reimburse uninsured depositors was a special case and would not apply to everyone.
Silicon Valley Bank’s branch in Toronto this week. The collapse of the California bank is having effects around the world as investors try to understand how it could have happened. (Alex Lupul/CBC)
Rates too high too fast?
Big bank failures are a worrying signal for all financial markets, but for banks in particular the way SVB collapsed was especially disquieting. And it all had to do with interest rates.
One key lesson for banks is that rising rates meant depositors in SVB had begun looking for a better return on their savings. That can be a problem for any bank because, while it seems only months ago there was too much money slopping around the economy willing to accept tiny rates of return, suddenly using and lending people’s money may be getting more expensive.
It’s sometimes easy to forget the essential rule that banks take deposits and then lend that money out over a longer term at a higher interest rate. If people start start withdrawing their deposits, as they did at SVB last week, the bank knows it cannot call in its loans fast enough to pay the depositors the cash it owes them.
In general, that is not a problem because depositors are confident their bank is well managed and so everyone will not want their money at the same time. Not only that but banks keep reserves of cash and cash-like assets to satisfy a sudden surge in those who are anxious to withdraw.
And here is where interest rates hit the SVB a second time. Some of those cash assets were in bonds bought a few years ago when interest rates were low. Kept for the life of the bond, the bank would get all that money back. But due to the sometimes confusing way the bond market works bonds sold before maturity can be worth a lot less.
When depositors heard SVB was taking a drubbing on the sale of its bonds needed to pay depositors, they rushed for the exit. In California tech culture, they didn’t wait to line up at the bank as in bank runs of old. Instead, they used their cell phones to move their money instantly. But by protecting themselves, they made things worse.
The vast majority of deposits at SVB were over $250,000 US, and uninsured by the Federal Deposit Insurance Corporation or FDIC. (Dado Ruvic/Illustration/Reuters)
Private profits, socialist losses
Whether or not the FDIC move is considered a bailout, inevitably critics will say the rescue of multimillion-dollar businesses is another example of “privatizing profits and socializing losses.”
But, as in 2008, there are some good reasons for governments and central banks to show support.
Some commentators, including John Rapley writing this weekend in the Globe and Mail declared that businesses must be allow to fail, the idea that only crises allow the cleansing action of “creative destruction” where collapsing businesses make room for new and better businesses.
As worries grow that rates may have risen too high, too fast, Bank of Canada Governor Tiff Macklem is looking smart after the Canadian central bank paused its interest rates last time. (Blair Gable/Reuters)
The question remains, however, whether the collapse of SVB was a quirk or some kind of systemic problem. And if we did not see that one coming, are others lurking?
Certainly markets are now betting that interest rates will not continue to rise as quickly as Federal Reserve chair Jerome Powell recently predicted. Whether by luck or good management, the recent pause announced by the Bank of Canada’s Tiff Macklem is looking prescient.
As economic historians have told me in the past, financial crises often arrive unexpectedly, their causes only understood in retrospect.
Regulators, who are supposed to defend us from crises, will be scanning the horizon for more fallout.
So will investors. And the unpredictability of how they respond is one reason why what happens next remains difficult to predict.
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
Dollarama Inc.’s food aisles may have expanded far beyond sweet treats or piles of gum by the checkout counter in recent years, but its chief executive maintains his company is “not in the grocery business,” even if it’s keeping an eye on the sector.
“It’s just one small part of our store,” Neil Rossy told analysts on a Wednesday call, where he was questioned about the company’s food merchandise and rivals playing in the same space.
“We will keep an eye on all retailers — like all retailers keep an eye on us — to make sure that we’re competitive and we understand what’s out there.”
Over the last decade and as consumers have more recently sought deals, Dollarama’s food merchandise has expanded to include bread and pantry staples like cereal, rice and pasta sold at prices on par or below supermarkets.
However, the competition in the discount segment of the market Dollarama operates in intensified recently when the country’s biggest grocery chain began piloting a new ultra-discount store.
The No Name stores being tested by Loblaw Cos. Ltd. in Windsor, St. Catharines and Brockville, Ont., are billed as 20 per cent cheaper than discount retail competitors including No Frills. The grocery giant is able to offer such cost savings by relying on a smaller store footprint, fewer chilled products and a hearty range of No Name merchandise.
Though Rossy brushed off notions that his company is a supermarket challenger, grocers aren’t off his radar.
“All retailers in Canada are realistic about the fact that everyone is everyone’s competition on any given item or category,” he said.
Rossy declined to reveal how much of the chain’s sales would overlap with Loblaw or the food category, arguing the vast variety of items Dollarama sells is its strength rather than its grocery products alone.
“What makes Dollarama Dollarama is a very wide assortment of different departments that somewhat represent the old five-and-dime local convenience store,” he said.
The breadth of Dollarama’s offerings helped carry the company to a second-quarter profit of $285.9 million, up from $245.8 million in the same quarter last year as its sales rose 7.4 per cent.
The retailer said Wednesday the profit amounted to $1.02 per diluted share for the 13-week period ended July 28, up from 86 cents per diluted share a year earlier.
The period the quarter covers includes the start of summer, when Rossy said the weather was “terrible.”
“The weather got slightly better towards the end of the summer and our sales certainly increased, but not enough to make up for the season’s horrible start,” he said.
Sales totalled $1.56 billion for the quarter, up from $1.46 billion in the same quarter last year.
Comparable store sales, a key metric for retailers, increased 4.7 per cent, while the average transaction was down2.2 per cent and traffic was up seven per cent, RBC analyst Irene Nattel pointed out.
She told investors in a note that the numbers reflect “solid demand as cautious consumers focus on core consumables and everyday essentials.”
Analysts have attributed such behaviour to interest rates that have been slow to drop and high prices of key consumer goods, which are weighing on household budgets.
To cope, many Canadians have spent more time seeking deals, trading down to more affordable brands and forgoing small luxuries they would treat themselves to in better economic times.
“When people feel squeezed, they tend to shy away from discretionary, focus on the basics,” Rossy said. “When people are feeling good about their wallet, they tend to be more lax about the basics and more willing to spend on discretionary.”
The current economic situation has drawn in not just the average Canadian looking to save a buck or two, but also wealthier consumers.
“When the entire economy is feeling slightly squeezed, we get more consumers who might not have to or want to shop at a Dollarama generally or who enjoy shopping at a Dollarama but have the luxury of not having to worry about the price in some other store that they happen to be standing in that has those goods,” Rossy said.
“Well, when times are tougher, they’ll consider the extra five minutes to go to the store next door.”
This report by The Canadian Press was first published Sept. 11, 2024.
TORONTO – The U.S. Consumer Financial Protection Bureau has ordered TD Bank Group to pay US$28 million for repeatedly sharing inaccurate, negative information about its customers to consumer reporting companies.
The agency says TD has to pay US$7.76 million in total to tens of thousands of victims of its illegal actions, along with a US$20 million civil penalty.
It says TD shared information that contained systemic errors about credit card and bank deposit accounts to consumer reporting companies, which can include credit reports as well as screening reports for tenants and employees and other background checks.
CFPB director Rohit Chopra says in a statement that TD threatened the consumer reports of customers with fraudulent information then “barely lifted a finger to fix it,” and that regulators will need to “focus major attention” on TD Bank to change its course.
TD says in a statement it self-identified these issues and proactively worked to improve its practices, and that it is committed to delivering on its responsibilities to its customers.
The bank also faces scrutiny in the U.S. over its anti-money laundering program where it expects to pay more than US$3 billion in monetary penalties to resolve.
This report by The Canadian Press was first published Sept. 11, 2024.
