Let it Fail? Reflections on the SVB Collapse and the US and Canadian Approaches to Bank Crises

Despite having highly similar economies, in banking the experience of the crisis-prone United States contrasts starkly with Canada’s stability. For each major US crisis, different reasons have been put forward to explain Canada’s comparative stability in the face of broadly similar shocks, an issue that arose again in the context of the failure of Silicon Valley Bank and its aftermath. This Commentary examines whether there is a unifying explanation for these contrasting outcomes and what this implies for Canada’s future financial sector stability. It identifies the changes introduced in the 1890 and 1900 Bank Act revisions that led Canada to manage banking sector problems in a cooperative arrangement between the banks and the authorities. The aim was to address the externalities generated by bank failures while controlling the resultant moral hazard through social networks rather than market discipline. Importantly, the system ensured enough competition to be efficient. Drawing on this comparative analysis, the Commentary considers the lessons to be drawn for future financial regulation.