The recent collapse of banks in the United States and this week's intervention by the Swiss government to facilitate the takeover of banking giant Credit Suisse might have some worried about a repeat of the 2008 financial crisis.
Dr. James R. Thompson, associate professor in the School of Accounting and Finance and co-director of the University of Waterloo's Computing and Financial Management program, sheds light on what's causing the instability in the banking system and how it might affect Canadian financial institutions.
What's responsible for the current bank collapses in the US and Europe?
The bank collapses started with Silicon Valley Bank, which specializes in banking for technology companies. With the recent contraction in the tech sector, other forms of financing, such as venture capital, started to dry up, forcing firms to rely more on their bank deposits for day-to-day operations. Once too many depositors withdraw funds, a bank run becomes sell-fulfilling: by moving your money away from the bank, it becomes more unstable, and in turn, more people become worried and withdraw their money.
Sadly, these types of panics can spread, with Credit Suisse being the most important casualty. Whereas most large banks are healthy enough to absorb outflows, Credit Suisse was not in such a position.
Learn more about: Q and A with the experts: The banking crisis and Canada