adplus-dvertising
Connect with us

Business

The world struggles to predict financial fallout from California bank collapse

Published

 on

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.

300x250x1

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.

People sit in a meeting room in the offices of Silicon Valley Bank in Toronto
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.

SVB (Silicon Valley Bank) logo is seen through broken glass in this illustration taken March 10, 2023.
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.

the
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)

Evidently there were many others who decided that preventing the destruction of an entire generation of dynamic young technology companies due to a quirky bank failure was more important than some austere economic principle.

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.

728x90x4

Source link

Continue Reading

Business

Canada’s carbon pricing is going up again. What it means for your wallet

Published

 on

Canadians in some provinces and territories will soon be paying a little bit more at the gas station as a federal carbon price is set to go up starting Saturday.

The fuel charge is rising by 30 per cent from $50 per tonne of emissions to $65 on April 1. This will translate to an increase of roughly three cents per litre for gas, reaching a total of 14 cents per litre.

The scheduled increase will apply in Ontario, Manitoba, Saskatchewan, Alberta, Yukon and Nunavut.

300x250x1

Meanwhile, the carbon price jump will go into effect in Newfoundland and Labrador, Nova Scotia, and Prince Edward Island on July 1.

Canada began pricing carbon pollution in 2019.

The move is part of Ottawa’s commitment to tackle climate change with a goal to reach net-zero carbon emissions by 2050.

While Canadians will see an increase at the pumps, the carbon price increase is not expected to have a huge impact on their gas expenses, said Hadrian Mertins-Kirkwood, a senior researcher with the Canadian Centre for Policy Alternatives.

“It’s an incremental increase, but it’s not actually going to be a huge change year-over-year that people will notice ,” he told Global News.

For individuals, it could mean a $1 jump per tank depending on how big the vehicle is, Mertins-Kirkwood estimated. For businesses too, it’s “not a major expense,” he said.

Mertins-Kirkwood said things like oil market fluctuations and gas taxes have a much bigger impact on energy costs.

“Those swings are way bigger than the carbon price.”

 

What else is changing?

The carbon price increase comes amid some temporary relief for Canadians with lower gas prices reported in February after record-high costs last year. Gas prices in Canada surpassed $2 per litre for the first time ever last year.

On a monthly basis, Canadian drivers paid one per cent less for gas in February, Statistics Canada said in its latest report released on March 21. Overall, gas prices dropped by 4.7 per cent in February – which was the first yearly decline since Jan 2021, StatCan reported.

The agency said the year-over-year decline is partially attributed to the significant jump in prices seen in February 2022 amid Russia’s invasion of Ukraine.

The Canadian national average for gas prices stood at 150.8 cents per litre on Friday morning, according to GasBuddy. The CAA’s estimate for Friday was 149 cents per litre.

The carbon tax will not only raise gas prices, but could make its way into Canadian pocketbooks in other ways too.

For instance, aviation gasoline in the four provinces is also going up by roughly 3.5 cents a litre to a total of almost 16 cents per litre, which could potentially mean higher airfares down the line.

However, the rates for aviation gasoline and aviation turbo fuel will remain unchanged in the territories due to the “high reliance” on air transportation, the federal government says.

Light fuel oil, which is used in household equipment, is increasing to 17 cents per litre – an increment of nearly four cents.

Carbon pricing can have also ripple effects on food prices, other grocery items and shipped goods experts say, as Canada’s truck-based transportation industry will be spending more money to fill up the tank.

“It’s possible it could have an impact on things like shipping, but it’s a relatively minor impact,” said Mertins-Kirkwood.

 

Will rebates make a difference?

Ottawa has claimed that eight out of 10 Canadian families will get more money back than they pay under the federal carbon pricing plan because of the Climate Action Incentive.

Canadians can claim CAI payments by filing annual federal taxes.

Mertins-Kirkwood said most households, except those earning a high income, are “better off” from the carbon pricing due to the government rebate which recycles revenue back to families.

However, the Parliamentary Budget Officer (PBO), an independent watchdog, said in a report last year that a bulk of Canadian households over the long term will see a “net loss” from the federal carbon pricing by 2030-31.

The PBO said that Albertans in the top income quintile would pay the largest net cost from the carbon tax, while the lowest-income quintile households in Saskatchewan stand to see the largest net gain via the rebate.

— With files from Global News’ Craig Lord

728x90x4

Source link

Continue Reading

Business

What economists are saying about the latest GDP numbers

Published

 on

Canada’s economy continues to defy expectations for a pullback.

Statistics Canada released data on March 31 that showed the economy grew 0.5 per cent month over month in January, a remarkable reversal from December when GDP contracted 0.1 per cent. January’s reading also beat Bay Street analysts estimate for growth of 0.4 per cent.

At the same time, Statistics Canada said preliminary data suggest the economy grew 0.3 per cent in February, indicating additional momentum. Economic activity rebounded in the vast majority of the broad industries that the agency monitors, including manufacturing, construction, and accommodation and food services.

Economists said the monthly numbers suggest quarterly GDP — measured somewhat differently — probably grew at an annual rate of around 2.5 per cent, well above the Bank of Canada’s forecast of 0.5 per cent.

300x250x1

While the report showed an economy healthier than many expected, economists now think the GDP surprise could make the Bank of Canada‘s job tougher as it seeks to cool inflation by raising interest rates to tamp down demand.

Here’s what some of them are saying about the GDP numbers and what it means for the Bank of Canada and interest rates.

Charles St-Arnaud, Alberta Central

“Today’s release of the monthly GDP suggests that the Canadian economy started the year strong. As such, the strength in January and February is pointing to growth in the first quarter of 2023 at around three per cent quarter over quarter annual rate, far from a contraction. This follows a period of weakness in the last quarter of 2022, as higher interest rates took a toll on rate-sensitive sectors.

“The resilience of the Canadian economy is likely to complicate the Bank of Canada’s job of bringing inflation back to its target. The Bank of Canada signalled at its latest meeting that it would keep its policy rate unchanged for some time to better assess the impact of previous rate hikes on the economy and inflation. However, with growth likely close to three per cent, excess demand in the economy is growing, adding to inflationary pressures and raising the likelihood that further rate hikes will be necessary. Similarly, the tight labour market is supporting strong wage growth. However, the banking woes in the U.S. and Europe suggest caution is warranted.

“The Bank of Canada is likely at a crucial juncture and facing a significant dilemma. The central bank may have to choose between fighting inflation and hiking interest rates again or focusing on financial stability and keeping rates on hold.”

Stephen Brown, Capital Economics

“The strength of GDP growth in January, and probably February too, suggests the Bank of Canada will use its April meeting to reiterate that, despite the recent banking turmoil, it is still prepared to raise interest rates again if needed.

“The big surprise is that, despite the early estimates showing falls in manufacturing, wholesale and retail sales in February, the preliminary estimate points to another 0.3 per cent month-over-month gain in GDP last month. That gain implies the economy is heading for growth of about 2.5 per cent annualized this quarter, slightly higher than the two per cent gain we have pencilled in.

“A 2.5 per cent expansion would also be stronger than the bank’s forecast of a 0.5 per cent rise, but recall that the stagnation in GDP last quarter was weaker than the bank’s estimate of a 1.3 per cent gain. Moreover, we know that the rebound in activity is helping to lower prices rather than contributing to inflationary pressures. For example, the CPI passenger vehicle price index fell by 2.5 per cent over the first two months of the year. So while the bank will stick to its hawkish messaging, we doubt recent developments will cause it resume rate hikes.”

Douglas Porter, BMO Economics

“There were many indications that the economy got off to a solid start in 2023, but today’s double-barrelled blast of strength is well above even the most optimistic views. Even if growth stalls in March, it now looks like Q1 will post growth of 2.5 per cent, up from a flat read in Q4. While we continue to look for a notable cool-down in the next two quarters, we are bumping up our GDP growth estimate for all of 2023 by three ticks to one per cent. Suffice it to say that if the strength seen in the opening months of the year persists, the Bank of Canada is going to find itself in a tough spot.”

Randall Barlett, Desjardins Economics

“Today’s outsized move in January real GDP and continued momentum through February leaves little room to equivocate. The Canadian economy started the year on a very strong footing. We are now tracking real GDP growth approaching three per cent annualized in Q1, well above the bank’s 0.5 per cent tracking in the January 2023 monetary policy report.

“As such, expect substantial upward revisions to the central bank’s near‑term forecast when it’s published in a week and a half. But with the recent global banking sector volatility and inflation coming in below expectations in February, there are plenty of good reasons for the bank to stay on the sidelines for the foreseeable future. However, the data suggest the central bank should reiterate its hawkish‑leaning forward guidance.”

Tony Stillo, Oxford Economics

“After stalling in Q4 2022, it now looks like GDP will grow modestly in Q1. Still, we believe a contraction in the economy will be unavoidable this spring and summer as the full impact from higher interest rates materializes, lenders tighten credit due to ongoing financial turmoil, and the U.S. slips into recession.”

Matthieu Arseneau and Alexandra Ducharme, National Bank of Canada Economics

“Despite the continued rebound of the Canadian economy in Q1 after a sluggish quarter, we still believe that the Bank of Canada should maintain its pause in monetary tightening. The rate hikes have been very aggressive and will continue to weigh on the economy given the lag in their pass-through.

“In addition, the outcome of the ongoing turmoil in the global banking sector and its impact on credit conditions in the coming months remains uncertain. We expect to see ups and downs in output in later quarters that will leave GDP essentially flat over the next year. This is an argument for patience. All the more so given the encouraging developments in inflation that are now emerging.”

Jay Zhao-Murray, currency market analyst, Monex Canada

“While the Bank of Canada is currently on a conditional pause as it awaits more data, the strength in the real economy, as measured by upward revisions from last month’s preliminary figure (for GDP) and another probable above-potential reading in February, could tilt the central bank in a more hawkish direction.

“While it is still too early to call for another rate hike, the odds are shifting in that direction: BoC officials stated they are mostly worried about upside risks to inflation and have shown little panic about recent global banking troubles. Stronger growth means the costs to another hike are falling, and it also puts upward pressure on inflation. Markets largely agree with our assessment, as they are now pricing only 35 basis points of rate cuts by year end, the fewest in nearly three weeks, and a far cry from the 90 basis points of cuts priced just a week ago.”

• Email: gmvsuhanic@postmedia.com | Twitter:

728x90x4

Source link

Continue Reading

Business

Reactions to Rogers-Shaw deal mixed in Alberta

Published

 on

Reaction to the $26 billion Rogers-Shaw merger in Alberta was mixed on the day it was announced.

Bob Schulz, a professor at the University of Calgary’s Haskayne School of Business, called the merger a “win-win.”

“It’s a blockbuster deal for Canada, but it could be the rising (rural telecommunications) star for the world in the developing countries that we actually test here,” Schulz said Friday.

300x250x1

He noted Canada’s spread out pockets of population presents a unique operating environment for telecommunications companies, and faces competition from emerging companies like Elon Musk’s Starlink.

Shaw executive chair and CEO Brad Shaw said the deal was an “exciting new chapter” for connectivity in the country.

“In today’s telecommunications industry, we recognize that companies need even greater scale to compete and make ongoing investments for future technology,” Shaw said in a statement. “This merger will provide the scale necessary for the future success and competitiveness of the wireline business that Shaw has built over the past five decades.”

Schulz was quick to point out that while the merger would reduce two telcos into one, the stipulation that Shaw’s Freedom Mobile be sold to Quebecor-owned Videotron will help with competition in the mobile phone market.

“Consumers may think it’s a bad idea by having the two go together, but if Videotron comes in because they have lower prices, it may force the Rogers-Shaw combination to move down.”

The U of C professor said the conditions of the merger is likely to put added pressure on existing telcos.

“If Videotron decides that they’re going to expand, then Bell would have to do something a little different in order to compete or decide they’re going to compete less of the west and more of the east,” Schulz said. “And it’s also going to be interesting to see what happens with Telus, because now Telus will have a stronger competitor to compete with in the west.”

Alberta promises to hold merger to terms

Minister of Technology and Innovation Nate Glubish said the Alberta government will be “unwavering” in holding the merged companies “accountable to conditions of this deal and the commitments they have made to Alberta jobs, consumers and communities.”

More on Canada

“We will closely monitor the requirement for Rogers to create about 3,000 jobs in Western Canada and invest a further $1 billion to connect rural, remote and Indigenous communities to high-speed internet,” Glubish said, noting the investment aligns with the province’s broadband strategy.

He welcomed the entry of the low-cost mobile offering from Videotron, which is to include rates 20 per cent lower than current offerings and invest $150 million into their network.

“While the telecommunications industry is under the exclusive jurisdiction of the federal government, we will hold Rogers and Shaw to their commitments outlined in this deal and protect Albertans’ interests going forward.”

The Opposition’s municipal affairs critic called the merger a “loss of an iconic Alberta company.”

“(Shaw has) deep roots in the province that go back almost 60 years, employing hundreds of people in their headquarters in Calgary and thousands across Western Canada,” Calgary-Buffalo MLA Joe Ceci said in a statement.

Ceci said a deal of this size will change the telco landscape in the country and could jeopardize jobs, increase customer costs and reduce access to services.

One of the 21 stipulations made by the federal government was for Rogers to establish a western headquarters in Calgary.

“I am encouraged to see these conditions included in the deal and we will be watching closely to ensure they are implemented,” Ceci said in a statement. “However, it is concerning that the Danielle Smith government failed to advocate for Alberta. They sought intervenor status in the deal, but did not take a position.”

Albertans balk at ‘less choice’

Calgary student Ashmal Dawoodani endorses the government encouraging competition and called the Rogers-Shaw deal “only beneficial to the larger corporations.”

“Just selling off the mobile assets to another company is sort of like a short term solution. It’s not really looking too long-term,” Dawoodani said. “I think we do have some of the highest phone bills across the world and I don’t think that’ll change from such a small move like that.”

Nicole Flemming said the merger could limit options for customers like her.

“I like to have more choice with my cell phone providers and Internet providers so I don’t really like that idea (of the merger),” Fleming told Global News “It gives me less choice as a consumer – I like to shop around.”

Shaw Communications and Corus Entertainment, the parent company of Global News, are owned by the Shaw family based in Calgary.

728x90x4

Source link

Continue Reading

Trending