The country's banking system needs adjustments to weather future crises
Canada should prepare for a higher risk of bank runs in the future, according to a new report from the C.D. Howe Institute.
In the report, Mark Zelmer, a senior fellow at the C.D. Howe and former deputy superintendent at the Office of the Superintendent of Financial Institutions (OSFI), warned that "emerging clouds on the horizon" suggests Canada may need to rethink the existing checks and balances within the financial system.
Zelmer pointed to the 2023 collapses of several US regional banks and the downfall of Credit Suisse in Switzerland as evidence that reforms introduced after the 2008 global financial crisis may no longer be sufficient to protect the system.
“It would be easy to say, don’t worry, be happy because everything has gone well for several decades,” Zelmer said in the report. “But I think last year’s events have led me to think that the world is changing. It is better to think when times are calm about how things could evolve in the future as opposed to waiting for the problem. I would hate for Canada to lose its reputation.”
He said the digital age is making it easier for bank runs to happen faster than ever before. For example, Silicon Valley Bank lost 85% of its deposits within just two days, which demonstrates the increased speed at which depositors can withdraw funds due to fears of insolvency.
Zelmer's report also noted that smaller, less sophisticated institutions are vulnerable to these rapid withdrawals if they share similar business models or client bases, adding that such institutions could collectively pose risks to the broader financial system.
While Canada has not seen major bank failures in recent years, Zelmer stressed that now is the time to consider changes.
“There is a risk that more rules and more intense supervision of non-financial risks and governance practices could blur the line between bank management and regulatory oversight,” Zelmer noted. “This approach could also potentially dampen incentives for innovation. They may be tempted to simply manage ‘to the regulatory requirements.’”
Zelmer offered several potential solutions, though none are a perfect fix. One option is to expand deposit insurance coverage. Currently, Canadian deposits are insured up to $100,000, but increasing this coverage might boost depositor confidence. However, Zelmer noted that such measures may not significantly reduce the likelihood of a bank run.
Another recommendation is for the Canada Deposit Insurance Corporation to modernize its payout system to allow for quicker reimbursements in the event of a bank failure. Additionally, Zelmer suggested that banks could be required to hold larger reserves of high-quality liquid assets to help them withstand financial stress.
“That way, they would be able to survive for a longer time in the event of a run,” he said.
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The Bank of Canada could also adapt its emergency liquidity facilities to make it easier for banks to access funds without immediately signalling trouble to the market.
“The moment a bank goes to the Bank of Canada looking for money, it immediately signals that the bank is in trouble,” Zelmer said. “Nobody wants to do that because it basically says that you have lost the confidence of financial markets at that stage.”
While none of these options is a complete solution, Zelmer urged the public and policymakers to start discussions about the future of Canada's banking system.
“People should start talking about what kind of banking system they want in the future given what happened in recent years,” he said.
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